It appears that some of the angst that has been driving the price discovery of WTI Crude following the Thursday FOMC inaction is starting to abate as the risk-on trade seems to be in effect across the majority of markets. There is little from a pure fundamental perspective as commodities continue to attempt to digest the Fed’s decision and the ensuing implications.
It has seemingly resumed, at least for now, the risk-on/risk-off relationship between the energies markets and equity, bond and metals markets. Market participants don’t seem to have much conviction one way or the other as the price discovery is floundering back and forth—up one day and down the next.
The energies do have some fundamental developments that could have an impact in this climate. With the current bear market pausing for the moment as the Fed decision ruled all, new information showing a third week in a row of declining U.S. rig counts has had a supportive effect on the recent move down. Furthermore, data out of Saudi Arabia has confirmed what we alluded to earlier in the year, as we have seen exports of crude slow out of the largest global producer while refined product exports are rising.
This is due to the Saudi’s recent commitment to refining more fuel on their own and fetching a greater price through exporting refined material rather than the raw crude right out of the ground. This will continue to evolve over the coming years as the global energy footprint continues to change. Potentially, talk of the U.S. changing its export laws for raw material could be influenced, as players continue to fight for market share both up-stream and down-stream.
Natural gas has fallen lower as there is a technical development that could keep prices lower longer. The recent tightening ranges have created a rather fine pennant that was violated to the downside as the market gap opened lower. The low of 2.622 in the November contract was defended as the market jumped higher after touching it to the number, yet there was little follow-through as the price now is just 2.635.
The price would have to trade above 2.65 at the close to shrug off the bearish pressure. However, it should be noted that a bearish trigger like this in an already bearish market could have significantly less follow-through than if it were a trigger to the upside that had more room to run. The chart below illustrates that pennant formation with the downside trend line violation. Trade back through the lower trend is needed to halt downside price action, even if it is modest.
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