What Will Move the Market?

June 21, 2024

Written By Tim Danze

Have you ever had your vehicle stuck in the mud? It’s a frustrating experience. You’re in a deep rut, spinning your tires but going nowhere. Or maybe you start inching forward, but the moment you ease off the gas, you slide back and are stuck again. This is how the energy markets feel right now.

Many factors influence supply and demand dynamics, and a high level of uncertainty has left the market relatively stagnant within its current range. Various concerns related to the economy, energy demand, production and refinery operations are prevalent. Despite these factors, market conditions have remained largely unchanged. Notably, even geopolitical conflicts in regions such as Ukraine and the Middle East have failed to provide substantial momentum to drive significant market movements.

U.S. crude oil production has been strong for over a year now. At the end of 2023, production was just under 13 million barrels daily. So far in 2024, production is up around 13.12 million barrels per day, a very strong number. Crude supplies have built from 415 million barrels in early January 2024 to nearly 460 million in mid-May. WTI crude oil futures prices have gone from almost $70 per barrel in January to $87 in mid-April before selling off to around $80 per barrel as of this writing. The ongoing wars and a positive economic outlook spurred the surge.

Gasoline futures have followed much the same path as crude oil, seeing lower prices early in the year and a rally that peaked in April. January’s price was roughly $2.00, and we saw prices hit $2.85 in April. Since then, gasoline futures have traded lower to approximately $2.45 as I am preparing this article.

The diesel market has charted a similar path but on a smaller scale. The January low of $2.50 for ultra-low sulfur diesel futures was followed by an early peak in February of $2.90. ULSD futures have been trending lower ever since, dropping below the January low, which we didn’t see in crude or gasoline futures.

So, where are things headed? Diesel prices continue to trend lower despite supplies hitting levels on the lower end of the three-year average (but above 2023). I think prices were pressured lower by a lack of escalation in the geopolitical conflicts and worries about the U.S. economy. In late May, diesel futures are testing new lows, and basis values on forward contracts have eased lower, offering an excellent seasonal opportunity. Historically, diesel futures can see a downside correction from late April to May. Trends show those pricing slides are often followed by a fall rally from August to October.

I am almost hesitant to mention it, but I am often asked what will happen to energy pricing as the upcoming presidential election approaches. I try to limit political commentary, but the election outcome could influence energy policy and regulations and impact pricing in the short and long term.

Historical pricing trends show relatively normal patterns in election years; however, they may be exaggerated or slightly sped up in anticipation of the election. As mentioned before, diesel prices typically move gradually from a winter low to a fall high. Due to the election, we may see the rally peak earlier and the beginning of the historical end-of-year decline sooner than usual. Generally, the election cycle implications are more impactful in the equities markets than in energy.

With all this in mind, now is an excellent time to look for fall pricing protection. I recommend looking for opportunities to take hedge protection from higher prices by locking in a comfortable percentage of your fall needs against a seasonal rally.