Energy Outlook

February 16, 2023No Comments

Today we’re going to talk about energy, specifically crude oil, and natural gas. Now, what I want to do is I want to talk about a backdrop of what’s happening with energy storage, like oil storage. Let’s dive into this insightful journey as we unravel the complexities and developments shaping the Energy Outlook.

Exploring the Current Energy Outlook for Crude Oil and Natural Gas

There is an inventory survey on crude oil put out by the American Petroleum Institute, and it gives us a weekly reading on oil inventory, WTI oil, and other products surrounding that, by the way. Obviously, if we have a lot of excess in crude oil inventory, that means we’ve got too much of this stuff and therefore prices should come down. If we have less than expected usage of inventory, they project what the usage is and they compare that to what they have in inventory and if there’s less than they need, so to speak, then that’s bullish for prices. This is pretty common sense so far. This is a chart of API, American Petroleum Institute, and inventories, and what you’re going to see is this goes from 2019 to 2022, just absolutely as of last week, and I’m recording this on February the ninth.

You won’t see the dates at the bottom and my apologies, the chart was chopped off. But whatever the case, what you’ll see is there are points when inventories get too high in capacity versus the usage expected and points when they get too low. Now, you can imagine these points are inflection points for prices. It eventually results in an inflection point. The other thing I want you to notice is that nothing lasts forever. They do tend to go back and forth between too much and too little. So let’s take a look at some of these key points. I’m going to circle primarily where we are now, and I want you to notice that we’ve just gotten a bar of too little inventory compared to expected usage.

Energy Outlook - API Inventories Chart

Global Influences on Energy Projections: Shaping the Energy Outlook

This is all based on how much capacity we have based on expectations. Expectations may be incorrect, but they always try to plan based on what they expect will be used. Now, there are a number of factors that might be influencing energy outlook to go up, and that might be things like the Ukraine War. It might be the reopening of China, it might even be people in North America traveling more. So just bear that in mind, but I want you to look a couple of specific areas. This is before the Covid crash. You can see we had a lot of inventory based on what was expected to be used and then along came the crash. This is why we saw a crash is because we had so much inventory and then of course, Covid came along and nobody used any oil so our inventories versus what expected use went through the roof.

It was a bit of a leading and coincident indicator, but again, nothing lasts forever and what we saw was as the reopening occurred on the market, people started driving and people started using oil more, and we were suddenly in a low capacity arena and, of course, you guys know what happened to oil. Basically right after the Covid crash, about six months later, oil started to rise from $40 to ultimately $100 before it peaked at the beginning of 2022. Keep that in mind when you see one bar, that’s just a bar. But if we see a cluster of bars and particularly a long series of bars, which could be say over the next month or two, then we’ve got something to talk about. So I want you to keep that in mind.

It’s not, right now, saying emergency oil is going to go up. It’s just one week, but it could be the beginning of a change. So let’s see. This is a chart showing us WTI prices over that same period. So this is from 2019 on the left side to current. And really there’s the point when we had all those inventories and you can see then the Covid affair happened and nobody could drive and whatnot. So of course we had all these inventories, and then we went into a point of having way too much in the way of inventories, which was bearish for oil because people weren’t using the stuff. They had projected a certain amount of usage. Covid comes along, changes the picture. But here’s the problem is then the shutdowns sort of created an atmosphere of, oh, we’re not going to need this stuff.

WTI Crude Oil Futures Seasonality chart


Well, suddenly it reopens in a few months, and guess what happens? Our inventories versus what was expected to be used, the formula reversed, and of course, prices went up like crazy. Now, there were a couple of blips along the way. I have circled them on the chart. But the most important thing you need to realize is that anytime inventories versus expected use, EST stands for estimated needs, that caused a price spike. Whether it was short, like here to the downside or a long, like here, you had a supply-demand situation. Well, here’s the point in late 21, and early 22 where we had too much inventory, and of course that eventually put pressure on prices. You guys know that for the first half of 22, that’s this period in here, right into about here, we had falling oil prices until about the late summer two-thirds of the way through the year.

Then we sort of started trading sideways. You can see it’s largely been sideways on the chart and as you saw on my one spike that I noted to the downside on the weekly production inventory forecast, we saw that we are right now holding less than anticipated usage. That’s one week. It doesn’t mean a trend, but it’s something to watch because the other thing I wanted you to do to notice on that chart was that nothing stays the same. It tends to go in clusters. Well, we had a cluster up here of too much inventory and now we maybe don’t have enough. We’ll find out. So let’s start to take a look at the chart itself.

$WTIC (Weekly) 77.14 Chart

What we have here is a chart of crude, and you can see it’s more or less been consolidating for a number of months and we have some of the momentum indicators. Stochastics, RSI are moving up, MACD is kind of sideways, and accumulation distribution, which is really just money flow, is relatively sideways, but we do see some momentum in that money flow picking up. This is a momentum oscillator for money flow, and you can see it’s picking up. So that’s kind of positive.

Exploring Seasonalities

Now we’re going to look at the seasonalities of oil. And you can see that oil tends to have kind of a rough period in the early part of the year, which it has, I guess. It tends to, somewhere around halfway through February or so, now this is on average, find a low point and then move up strongly right until the summer. You can see that, particularly into June, by the way. So we are just about to enter into the seasonally favorable period. Now, remember seasonalities just because it says, oh, roughly the 15th or so February is the point to buy, it doesn’t necessarily mean you must go out and buy on the 15th. You might wait till the end of the month or the beginning, but it’s a heads-up as to what could happen based on seasonal patterns and you need the chart to agree with you. So right now it’s consolidating a sideways period. If you’ve ever taken my technical analysis course, you know that it’s okay to buy within a consolidation long as you’re buying at the bottom of the range of consolidation and that’s kind of where we are right now.

So not such a bad thing to be looking at oil, I think, right now. There’s enough of an argument. It’ll get stronger if those inventories continue to be less than expected. So let’s take a look at oil stocks and delve into the evolving energy outlook. You can see, even though oil itself, WTIC oil was trading sideways, the stocks seem to be moving up and that’s actually probably because equities are forward-looking. Investors that buy the stocks are anticipating a positive shift in the energy outlook, well, gee, I think oil’s going to go up over time. So they start buying the stocks and they look forward to when those companies might make a profit based in the future based on higher oil prices. You can see oil is trending up a little bit, although it’s still got that wall ahead of it, back to it’s highs of 22.

Energy Outlook - Natural Gas chart

But you can see stochastics definitely picking up, RSI picking up, MACD though, which is the bigger indicator, is moving down. So keep that in mind. It may not just yet be time to buy until we see a definitive hook, sort of like we got there or there. You get these hooks and you can get a decent move on a stock. We need to see that hook on MACD before I get too excited. But the other thing is accumulation distribution, which is money flow. It’s clear the cumulative line is moving in a bullish trend and the momentum line, you can see the momentum, it’s moving up. So that’s all good. Basically what we’re seeing is oil itself is kind of moving sideways, but there’s some signs of positiveness. There is seasonality coming in the equities themselves. They’re also showing some signs of positiveness. Natural gas, this is my final chart and I own a tiny little piece.

A Calculated Approach to the Energy Outlook

I took a little piece recently of natural gas thinking I was buying it on the cheap and it only got cheaper. Thankfully we only bought 2% in our entire portfolio. We’re not buying anymore yet but there is a major support level coming and yes, if you were to look at a number of momentum studies on gas, you would probably find that it’s pretty oversold. It could get more oversold. So that’s why it was a speculative position for us. We’re just seeing if we could catch that falling knife, which we don’t like to do at ValueTrend very much because there are seasonals that are going to come into favor for this sector as well, and I’ll show you that now so you can see that if you are buying in February that often you’ll see gas move up into around June or July, very similar to oil.

So if we go back to the big picture chart, there’s a potential that you’ll see gas pull back a little further, but there is some decent support you can see in. It’s not the all-time lows, but there’s some decent support that could come in at a round $2 or so on Nat Gas. So something to think about. Again, I’m not going in with both feet and I put the toe in the water just for an aggressive trade, let’s call it. But we are most definitely starting to step into energy. Craig and I at ValueTrend, we’re doing it slowly. If you know anything about how we work, we don’t just plunge into anything, but we’re just finding stocks and we’re finding positions that are near the bottom of their trading ranges and don’t seem to be showing any signs of breaking down.

We’re buying a little position here and there, and that’s just the way we’re trading it. We use a stop loss system that if it breaks that long-term support, we’re out. We calculate that the risks for us are relatively low on some of the positions that we’ve been buying, especially in the context of the evolving energy outlook. So that might be something that you could explore as well, but I would definitely wait if you’re going to be aggressive about it until on the longer term charge for oil and the equities, you saw that hookup on MACD. So I hope that makes sense and we’ll be back next week with another interview, I hope.

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