Update on Oil & Gas: Jun 4, 2018

Two weeks ago, it appeared that oil and gas had finally topped out and were ready to do some backtesting. From Once More With Feeling:

And, with a little over a week left before May’s CPI is written in stone, it’s time for CL and RB to implode — at least to their initial backtest targets. Even lower targets would put CPI back at 2%, but could be a drag on stocks.

It’s now too late for May’s CPI to revert to anything close to 2%. The EIA reported May 2018 average gas prices at 2.81, a 21.9% YoY increase — which should put May 2018 CPI at 2.6-2.8% (up from 2.5% in April), depending on how creative the BLS gets.

However, June 2017’s range was even lower than in May 2017. Current prices would yield a 27.5% YoY increase. The last time gas prices increased that much was in February 2017, when CPI came in at 2.74% — the highest it had been since Feb 2012.

Several interesting things happened on Mar 15, the day Feb 2017 CPI was reported.

First, SPX rallied 25 points off the previous day’s close and 42 points off the previous day’s low – not a bad day for stocks. It touched off a 68-pt slump, however. Stocks wouldn’t top the Mar 15 highs again until April 25.

Oil (WTI) prices fell 14.5% from Feb’s highs to Mar’s lows. Gas (RBOB) prices had fallen 11.3%. So, the seeds were already sown for a drop in CPI — which came in at 2.4%, 2.2%, 1.9% and 1.6% over the subsequent four months.

About the only bullish development was VIX, which plunged 15.5% from the previous day’s highs to 10.6, among the lowest levels it had reached in the past 10 years.

In other words, in the face of a mini-meltdown in oil and gas the algos were happy to take their cues from VIX. Is it any surprise that VIX is dipping below its 200 DMA as the market is about to open this morning?

As to CL and RB?

Now that they have both tagged our initial downside targets, we’ll take a look at next steps, and what it might mean for stocks, bonds and interest rates. For a refresher on the relationship, see: Oil & Gas, Inflation and Interest Rates: A Delicate Balance or Goal Seeking?