US energy markets have all compressed in the last few days. WTI crude and heating oil have yet to break their compressions whereas Rbob gasoline seemingly did, only to run immediately into resistance at an older compression. Natural gas is also compressed although this has not been moving with the others for some time – influenced as it is mainly by the copious amounts of gas coming from shale.
As has been widely commented elsewhere, shale should eventually transform the US energy landscape as gas replaces other fossil fuels to some extent and this puts downward pressure on oil and coal prices. This has already happened in anticipation of this increasing shift and the logical outcome is that oil prices should fall yet more over the longer-term and gas prices should continue to rise as more gas-fired power stations come ‘on-line’. There should be some convergence in other words between the price of these two competing energy sources. Gas prices in Europe are 4 times the price that they are in the US and many are looking to gas to be the salvation of the present economic mess in the US - a solution apparently not available to Europe.
Meanwhile, we cannot tell which way these compressions will break, as usual, so we advise ‘going with the break’, also as usual. We have a slight preference for downward breaks in Rbob, crude and heating oil, based on the existence of current downtrends in these markets but there is a warning from the UK that this may not be correct. Brent prices (also much higher than US WTI prices) compressed a little earlier at a daily scale, broke upward but immediately hit resistance from an old compression – similar to the situation in Rbob. Brent has also been compressing at a weekly scale however and this may be breaking upward – see second chart below. It is too early in the week to confirm this break, so we will monitor closely and report on Monday.
These compressions in energy are yet another piece of the puzzle that we have been assembling for some time - many asset markets are compressed and this tense situation will resolve soon - there are big prce moves ahead.