With the weather in the Gulf region returning to sunny skies and mild temperatures, a full assessment of weather damages is underway, and generally speaking the crisis is over. Gasoline refineries in the Houston area wasted no time, with the futures market reflecting a textbook return of crack margins to pre hurricane levels. Crude oil inventories were reported by the EIA Status Report to have increased by 5.9 million barrels, making the second week in a row of building stockpiles. Hurricane Harvey was a textbook example of how basic economics affects the energy markets. Refineries offline = decreased crude consumption + decreased gasoline supply. This directly translated into a rally in gasoline futures and sell off in crude in anticipation of Harvey (August 21 through September 1), and now that the storm has abated, that trend is unwinding and the “crack spread” is narrowing refiners margins. The chart below shows the widening of crack spreads from pre Harvey levels of roughly 17.00 cents per barrel to a high of 27.79 cents per barrel. By the time Harvey made landfall, the trade had returned to the futures market, and futures prices reflected a return of refinery operations.
The electronic futures market enabled oil refiners to protect their margins, capitalize on the higher gas prices, and lock in lower crude prices, all when their refining capabilities were incapacitated. This is a prime example of how futures should be used to mitigate risk for commercial interests, and how the market provides liquidity as service.
From a technical perspective, front month crude oil futures have broken above trend line resistance at the 49.00 handle (as seen on the chart below), and have held technical 50% Fibonacci support (drawn from the June lows to August Highs) at 46.24. This is constructive price action for bulls, as a clear big has returned to the market as US refineries first protect their margins (even before being able to turn their refineries back on) by buying crude oil futures, and second as real consumption of crude begins when those refineries get back to work.
The expiration of October options is sparking a short term fight over the 50.00 handle for front month (October) crude oil futures, and price action into this weeks close, in my opinion, is going to be very important to the near term direction of crude prices. Option expiration often coincides with movement in the outright price of futures, so the risk of volatility is generally higher.
The true test for resistance will be on a sustained break and close above the 50.43, which will immediately put the 55 handle highs from the beginning of 2017, back into the scope for bulls. Without a doubt, WTI crude futures are still in a range from 42.00 to 55.00 over the last year of price action, however, the current trade is taking the market higher in this range for the time being. Every test of the range highs and lows are a chance for a break one way or the other, but until then, we will continue to track the dynamics which are governing the price of crude oil.
Oct ’17 RBOB WTI Crack Spread Chart
Crude Light Daily Continuous Chart