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Blue Lacy Advisors, LLC - Final September Crude Oil Market Commentary

Minneapolis, MN | October 5, 2022 | By: HedgeStar Marketing

Another volatile week had many of the traders in my ICE chats throwing their hands up as compliance sent their passive-aggressively worded e-mail warnings of draw-down risk. Prices dove into the week’s end, resetting technical levels and confirming the downward trend. Our trend indicator had been turning positive but peaked at -0.39 in the middle of last week and has since dipped back toward -1.00. Likewise, Chai’s estimate of the influence of their combined trend models has a bearish tilt, pulling the weekly price range down by ~$0.15/bbl. Friday’s close sets first support at $85, down from $88, with minor support levels at $82.25 and $80 before projecting into the mid-$70s. These levels seemed unattainable just weeks ago, but traders are considering macroeconomic factors that have the potential to overwhelm the energy-specific tightness. Various indicators (more like rules of thumb) are causing traders to think about downside risk and even pushing them to take positions off. In the US, 2/10 yields are more deeply inverted than they have been since Sept. 1981, about the time the first paper on this type of yield analysis was published. Additionally, YoY changes in home sales were off by 22% in July and 18% in August. Historically, a recession has followed a dip of ≥20% in all but a few specific cases. The fear seems global, reflected in currencies, which may distort the price action of a dollar-denominated barrel. Major energy currencies’ correlations typically trade in the 20-40% range but peaked above 80% recently, with near-uniform weakness relative to the USD. Chai’s analysis shows that these currency factors have a consistently bearish influence on prices. The Chinese Yuan ranks among the top weekly influences in their model, but as Chinese crude purchases return, it bucks the trend by putting upward pressure on prices. Shipping data suggest waterborne imports dipped to ~8-8.5mm bpd versus a 24-month seasonal trend of closer to 10.5mm bpd. A rebound in Chinese refinery runs could support crude prices, but the overall effect is uncertain. On the one hand, oil production numbers have continually fallen short of expectations. Analysts have cut non-OPEC production expectations by ~1mm bpd compared to forecasts made at the beginning of 2022. Expectations now see non-OPEC production reaching 40-41mm bpd by the end of 2022, based mainly on disappointing performance from US producers. So, a return of Chinese imports could tilt the market into a supply deficit. On the other hand, the return of Chinese refined products exports could depress a potentially soft market for fuels. Right now, downside risk seems to be expressed in an otherwise tightly balanced market.

*This summary is based off September 26, 2022

A free excerpt, such as this one, will be published on a delay periodically. This is an excerpt from Blue Lacy Advisors, LLC's (“Blue Lacy”) weekly commentary for clients, which is based on a collection of models, research/analytical subscriptions, and bespoke work. Each week Blue Lacy explores how market drivers included in these analyses might affect or be used in clients' planning, budgeting, and execution of strategy. Call Blue Lacy to make an appointment today!


Meet the Author!

Phone: +1-832-413-3124

Steve has spent his career in strategy, risk, trading, and investment. He works with investors to source investments in opportunistic or high growth sectors, with particular interest in early-stage companies solving clearly defined problems.

He is currently a Managing Partner with Blue Lacy Advisors LLC, giving management teams and investors confidence in their decision making by supporting strategic planning and execution, risk management, commodity trading, and market analysis.

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