Oil and its products rallied throughout the entire month of July. Energy equities were also strong. However, the key driver behind this rally is fading. Is a correction in energy markets coming?
That key driver for energy was strong demand for oil products, especially gasoline. The demand started to diverge in the spring, and we alerted you to this trend from the beginning.
The best indicator for quantifying the product supply demand was the 3-2-1 crack spread. By the way, you can follow it in the SpreadCharts app yourself. At the beginning of July, the divergence between the crack spread and oil was so glaring that it was only a matter of time before the strong products lift up demand for crude itself. That trend manifested throughout July.
But here we are in August, and the first bearish hints are starting to appear. The first is the 3-2-1 crack spread itself that is starting to reverse, while the oil made a new high.
As I mentioned, the key driver of product strength was gasoline. And the RBOB interdelivery spreads have recently reversed across the term structure curve.
This is happening after money managers piled into gasoline and chased the rally. Their net positions are approaching the high of the previous rally, and the number of traders who are net long already matched it.
Moreover, now might be a convenient time for a correction on energy. Treasury bonds have become extremely short-term oversold. And on Friday, we saw a tall green candle off the support, signaling a potential reversal. Any bounce on bonds would put energy under pressure.
But there are a few points you should remember:
All of this is short-term stuff.
These reversals in the data are still very subtle. There must be a follow-through for any meaningful correction to materialize.
Oil is a geopolitical commodity. Any major news or event from Saudi Arabia or Russia, and you can throw all these charts into the garbage bin. A good example is the recent USV drone strike on a fuel tanker in Novorossiysk this weekend. We have yet to see how the market reacts to it.
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Disclaimer
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Why are we using (2RB+HO-3CL)/3 as a reference?