Oil and gas futures have both tagged our next downside targets from June [see: Update on Oil & Gas, June 6, 2024.].
We’ll take a look at the road ahead and what it means for the equity and bond markets.
continued for members…
CL has not only tested the Dec 2023 lows, but the midline of the huge rising red channel from 2014. It’s an odd channel in that it broke down during the pandemic crash and broke out when Russia invaded Ukraine. Both moves were reversed, bolstering the argument for the legitimacy of the channel.
If CL can’t hold the midline, there’s additional support just below: the purple trend line at 66ish. It can also be considered a neckline, though the target of such a pattern would be below zero. It completed in May 2023 and failed to follow through, meaning that there’s a concerted effort to prevent another 2020-style crash.
RB is similarly in a position where lower prices could touch off a crash, as it is defending its own neckline at 1.90ish.
Its rising purple channel from the 2020 lows broke down in July, so at this point it will need to start backtesting that channel to achieve a rebound.
By now, members will all be familiar with our comparison of YoY gas prices to CPI.
The chart illustrates the base effect for gas prices which will be felt in September. Aug CPI, which will be reported on Sep 11, should show a decline from July’s 2.89%, justifying the Sep 18 FOMC rate cut which everyone knows is coming (either 25 or 50 bps.)
The next FOMC meeting won’t come until Nov 6, the day after the Federal election. This meeting would come after the Sep CPI, but before the Oct CPI. So, the dip that RB/CPI should show (per our model) should justify another rate cut in November, all else being equal.
That’s a tall order, of course. The election is shaping up as hugely consequential. And, who knows what will be happening in the Middle East or in Ukraine by then? Will OPEC help Trump by forcing prices (and, therefore, CPI and interest rates) higher even in the midst of a demand downturn, thereby producing an equity selloff? You can bet Trump is on the phone with MBS and Putin daily, insisting on such action.
If it happens, you can bet that the Biden administration will be dumping oil from the strategic reserve as fast as possible in order to moderate any potential price increases. In fact, it would be smart of them to start doing so in the next week or two in order to mitigate the rise which is already built in via the base effect. Who wants to start out behind the inflationary eight ball?
Bottom line, while we can anticipate a bounce at current or slightly lower prices, it should be a tug of war from here through November.
GLTA.