In eight weeks from late July, WTI fell from the mid-$80s to the mid-$60s for many reasons. Initially, it was concern over whether the US was heading into or already in a recession. That would cut oil use. The concern was generated by labor market reports suggesting greater weakness than expected, usually associated with recessions or slow growth.
However, the Atlanta Federal Reserve Bank’s GDP forecaster predicts a third-quarter growth rate of 3 percent—a healthy economy. Confusion over economic conditions was fanned by a labor market revision which found 800,000 fewer jobs in June 2024 than was previously reported. How do that many jobs disappear? Don’t worry, we were told, because some experts expected an even larger negative revision. For over 12 months, we were told about healthy monthly job gains only to find out they were fictional.
Labor market woes quickly took a backseat to an improving Consumer Price Index showing overall inflation easing. Included in the report was evidence that Core CPI, which removes food and gasoline, was going in the opposite direction. Thus, all the CPI improvement came from lower gasoline prices and better vegetable, grain, and meat prices.
Improving inflation data with a solid labor market ignited a debate over whether the Federal Reserve should cut interest rates by 25 or 50 basis points. Any cut would help financial markets and consumers. Reduced interest rates should lower home mortgage, automobile loan, and credit card interest payments. Those would boost economic activity, and help struggling consumers smothered by high debt payments.
The final oil price pressure point was OPEC’s plan to restore to the market its idled production which had supported prices. OPEC’s announcement came as Chinese data showed continuing economic weakness dampening oil consumption.
The weak economic data and OPEC’s plan spurred commodity traders to sell options on crude oil. Their negative positions outweighed their positive holdings, putting extreme pressure on oil prices. However, prices only go in one direction for a while before switching and changing the market’s tone. OPEC’s announcement that it would continue its voluntary production cuts through the end of the year helped the tone of the oil market.
WTI is back above $70, its long-term support level. Technically, brief excursions below support or above the resistance level do not mean the long-term trend has been broken. These excursions attract attention, however. People will watch the economic data closely, especially now that the Fed has cut interest rates by 50 basis points.
Long-term oil supply and demand trends appear in place to keep oil prices in the $70–$84 trading range. The very low US inventories of crude oil and petroleum products compared to the five-year average provide further support for prices remaining within this range.
NATURAL GAS
Hurricane Francine drenched the Louisiana Gulf Coast but did little damage to natural gas demand or supply. There were only temporary power disruptions and no reports of serious problems for offshore petroleum-producing facilities.
After spending most of 2024 with gas storage levels above the five-year maximum, they have now reached their lowest point of the year. The most recent three weekly gas storage reports show injections below last year’s comparable weeks. However, they are substantially above the weekly injections of July and August when the nation was engulfed in a massive heat wave.
The weekly data suggests the gas market has entered the fall shoulder season when heat eases the air conditioning load and cold weather to drive heating demand is absent. There have been isolated snowstorms in the Rocky Mountains and Great Plains regions, but they were fleeting events. The primary weather trend that could impact natural gas markets in the near term is tropical storms. This season has proven to be a disappointment for meteorologists who have been forecasting record storm activity. Some forecasters have reduced their seasonal storm predictions. A recent long-term storm forecaster we follow indicated only one disturbance in the Atlantic Ocean. But it had less than a 50 percent chance of evolving into a named storm before the end of September. We have passed the peak of the hurricane season, September 10th, which suggests atmospheric conditions are less favorable for storm development and intensification.
This story was originally featured in ON&T Magazine’s October/November issue. Click here to read more.
