Stock Market Losses Spilling Over to Oil

Oil prices are gathering steam this morning, though given recent volatility it’s well within the realm of possibility that prices revert lower again. Crude oil is currently trading at $67.52, up 70 cents from yesterday’s close.

Fuel prices are mixed this morning, with extremely high gasoline production weighing on gas prices while diesel trades in sympathy with crude. Diesel prices are currently $2.2696, up 1.8 cents from yesterday. Gasoline prices, on the other hand, are down to $1.8147, a 0.8 cent loss.

While prices are up this morning, it’s still far in the red for month-to-date returns. Much of the bearishness in oil prices is currently driven by equity market losses – yesterday the S&P 500 closed at its lowest point since May. There are two factors driving stocks lower, and both are significant drivers of oil prices are well:

1. Fundamentals – Although the US economy is growing rapidly and unemployment is at record lows, the resulting bid for US Dollars is putting significant strain on emerging economies. A strong dollar means other countries must pay relatively more to import products like oil and other goods, resulting in declining demand for oil and negative impacts for international companies.
2. Interest Rates – With unemployment low and inflation concerns creeping in, Federal Reserve Chairman Powell has promised interest rate hikes in December as well as 3 more in 2019. Higher interest rates not only support the US Dollar (as noted above) but also increase bond yields, causing investors to move funds from risky stocks and commodities into safer bonds. Remember that commodity markets are not driven by supply and demand – they’re driven by psychology and traders, who consider supply/demand fundamentals along with a host of other factors when investing.

EIA Inventory Data

Yesterday’s EIA report was small comfort to the market – although less than the API’s estimate, the EIA’s reported build still nearly doubled the trade’s expectation. Larger draws in gasoline and diesel stocks helped offset market angst, leading to a small bump in prices after steep losses two days ago.

The bump in prices was assisted by historically high seasonal demand this year – total petroleum demand was 21.5 MMbpd, one of the highest levels of the year and the highest for this week since 2006. High domestic demand was also met by a small uptick in crude and diesel exports. Refinery utilization appears to have bottomed out, with utilization rising to 89.2% this week, drawing down more crude stocks and adding to fuel inventories.