• WTI crude oil retreat 2.78% while Brent underperforms with a 4.2 loss
  • Gasoline and heating oil do better than crude oil
  • Heating oil crack spread gains 2.35% while gasoline refining spreads move 12.58% higher
  • Natural gas falls 13.3% as supplies flood into storage
  • Ethanol is the best performing energy commodity with an 11.9% gain in Q2

The energy sector posted a loss during the second quarter of 2019, but the price of ethanol moved significantly higher.

In 2014, the energy composite fell by 36.59% due to the swoon in crude oil, petroleum product, and natural gas prices. A composite of energy commodities fell by 25.14% in 2015, making it the worst performing sector of the year.

The energy sector finished 2016 42.57% higher than it was on December 31, 2015. In 2017 the sector moved 3.35% higher, adding to gains. Energy commodities were down 15.89% in 2018. In Q1 2019, the sector posted a 19.49% gain, but in Q2 it moved 1,54% lower.

Crude oil rose to a higher high in April, but that gave way to selling in both the WTI and Brent futures markets. Ethanol prices staged a significant recovery with the price of the biofuel moving above the $1.60 per gallon level on the highs on nearby futures on support from the corn futures market.

In the natural gas market, the memories of the move to the highest price since 2014 in mid-November when nearby futures rose to $4.929 per MMBtu has faded into the market’s rearview mirror. At the end of Q1, natural gas had moved to the price it was trading at before it took off to the upside in September and October last year. In Q2, it fell to the lowest level since 2016.

The energy sector of the commodities market will reflect the economic and geopolitical landscape as we move into the second half of 2019. The Middle East, which is home to more than half the world’s oil reserves, remains the most turbulent region on the earth. At the same time, Venezuela is a political and economic mess which means the nation with the leading petroleum reserves in the world is not likely to see oil output increase any time soon, or until the Maduro government leaves power in the country that has become an economic basket case. When it comes to China, the weak economy led to lower demand in Q2. Meanwhile, the US is now the world’s leading producer of crude oil with a daily output climbing to a new record at 12.4 million barrels according to the Energy Information Administration during Q2.

Energy commodities power the world. When it comes to crude oil, bullish and bearish factors on the economic and political landscapes were pulling the price of petroleum in opposite directions at the end of Q2.

Crude Oil Review

After rising to a high at $66.60 per barrel on the nearby NYMEX crude oil futures contract, the price of the energy commodity fell to a low at $50.60 during the second quarter before recovering at the end of Q2.

NYMEX light sweet crude oil was down 30.47% in 2015 after falling by 43.31% in 2014. In 2016, oil gained 45.03% on the year. In 2017, NYMEX crude oil gained 12.47%. The energy commodity that trades on NYMEX was 24.84% lower in 2018 compared to its price at the end of 2017. In Q1, NYMEX futures moved 32.44% higher for the three-month period. In Q2, it declined by 2.78%. Over the first half of 2019, the price of WTI crude oil was 28.76% higher than at the end of 2018. The nearby futures contract settled at $58.47 per barrel on June 28. NYMEX WTI crude traded in a range from $45.52 to $66.60 during the first half of 2019.

We have seen lots of price action in the crude oil market since October 2018.

Source: CQG

The weekly chart illustrates the fall in Q4 and price recovery in Q1 and Q2, but the price ran out of upside steam in late April and declined.

The US is now the leading producer of crude oil in the world as output reached a record high at 12.4 million barrels per day during Q2. The 1.2 million barrel output cut by OPEC caused both Saudi and Russian output to move lower while US production continued to rise to new record levels. In a sign that US production has become more efficient, the rig count according to Baker Hughes fell over the past three months and stood at 793 as of the end of June 2019, 23 lower than at the end of Q2, and 69 below last year’s level at the end of the second quarter of 2018.

Fewer regulations under the Trump administration and a more favorable corporate tax policy have improved the economics for U.S. producers, and the American oil industry has become a significant exporter of crude oil in the future. The U.S. is now the world’s swing producer of the energy commodity. When the price declines, shale output will decline, and the U.S. will import cheaper oil from abroad. However, when the price rises, American shale production will flow, and the U.S. will compete with other world producers to supply the energy commodity around the globe, and even to the Chinese if the two nations can finally reach a deal on trade. The issues facing the Middle East deteriorated in Q2, which could impact global supplies of the energy commodity. However, the US achieved its goal of energy independence because of technology and a friendlier regulatory environment.

Meanwhile, the rise of the U.S. has caused the influence of OPEC to decline dramatically. However, Russia became the most influential factor in the oil cartel’s decision-making process over the past years. After acting as a mediator or bridge between Iran and Saudi Arabia, the Putin government via their oil minister Alexander Novak may be the most influential force when it comes to production policy in the cartel these days.

Trade issues between the U.S. and China continue to threaten the overall health of the global economy. The summit between Presidents Trump and Xi on June 28-29 may have succeeded in getting the negotiations back on track, but there is a long road ahead when it comes to a final deal. The trade issue has weighed heavily on the Chinese economy, which impacts the world’s most populous nation’s demand for crude oil. A trade deal would likely be a bullish factor for the energy commodity during the second half of 2019.

Iran continues to be a growing problem in the Middle East, and as sanctions took effect in November 2018. The U.S. is attempting to choke the Iranian economy if they do not abandon their quest for nuclear weapons. The Trump administration had issued exemptions to eight countries when it comes to purchasing Iranian crude oil late last year. The news of the exemptions caused speculative longs in the oil market to liquidate their risk positions, adding to the downward trajectory of the price in early November. However, those exemptions expired during Q2, and the US refused to grant extensions. In Q2, Iran retaliated by attacking several tankers near the Strait of Hormuz and firing missiles at targets in Saudi Arabia. Iran downed a US drone in June, but the US used restraint and did not respond with any military action. However, President Trump put new sanctions on Iran during the final week of Q2. Iran began enriching uranium at the end of the quarter that ended last Friday.

When it comes to China, the lack of progress on trade which weighs on China’s economy sent the price of oil lower which could be part of the rationale behind the US’s move to eliminate the exemptions for purchases of Iranian crude oil. If President’s Trump and Xi cannot eventually come to terms, and the price of oil remains weak, it will be easier for the US to tighten the noose on the Iranians as we witnessed at the end of Q2.

The Strait of Hormuz is a narrow seaway that separates the Persian Gulf from the Gulf of Oman. While 2.7 million barrels of Iranian oil exports flow through the Strait each day, a total of 19 million barrels heading for consumption points around the globe flow through the seaway which represents 20% of the world’s daily demand. President Rouhani of Iran told the world in 2018 that if sanctions prevent Iranian exports, the theocracy will make sure that shipments from other oil producing nations in the Middle East would not flow smoothly to their destinations. Iran followed through on those threats in Q2 with attacks. The Strait of Hormuz is likely to remain a hub of international concern over the coming weeks and months. Any increase in hostile actions in the Middle East that impact production, refining, or logistical routes like the Strait of Hormuz could cause availability problems around the world. As the Strait is now a focal point, we have witnessed a military buildup in the area which raises the political temperature in the region.

Saudi Arabia depends on the US for military support in the region, given their ongoing battles with Iran. However, they have also been maintaining close ties with Russian President Putin. The position of Saudi Arabia and their relationships with the US, Russia, and their neighbors in the Middle East creates a complex puzzle that could impact the price of oil in the months ahead.

The three dominant oil producers in the world are the Saudis, Russians, and the United States. It is in the best interest of all three nations for the oil price to remain at a level that is high enough to allow oil and profits, but low enough to keep inflationary pressures in check. The U.S., Russia, and the Saudis will likely work together in some fashion, behind the scenes, to determine the global price of the energy commodity. Whether OPEC continues or ceases to exist, the influence of the three leading producers, two of which are not cartel members, has eaten away at the power of the cartel. The realization of the decline of OPEC’s influence led the tiny but wealthy nation of Qatar, which is the subject of a Saudi blockade, to leave the cartel as of January 2019. With the US election on the horizon in 2020, President Trump will likely seek to keep a lid on the price of oil via continued pressure on Saudi Arabia and other OPEC members. The Nopec legislation in Congress that would outlaw the cartel could have significant ramifications if it were to find its way to President Trump’s desk for a signature. The President is no fan of OPEC, but it is questionable if the Democrat-controlled House of Representatives would hand the President a victory by outlawing OPEC before the 2020 election.

The Middle East is a region that always has the potential for issues. We saw the impact of rising tensions with Iran in Q2 as news of attacks caused rallies in the crude oil futures markets.  The conflict between the Saudis and Iranians remains on five fronts. The front lines of war, if it breaks out, could be in Yemen, Qatar, Lebanon, Iran, or Saudi Arabia. Libya and Iraq could also become battlegrounds between the kingdom and theocracy if the conflict escalates. The potential for hostilities in the Middle East had kept a bid under the price of crude oil as there is always a potential for price spikes if production, refining, or logistical routes in the area remain targets in coming weeks and months. The two sides each have powerful backing as the U.S. stands with KSA and Russia is behind Iran. However, there are many shades of gray when it comes to allegiances in the Middle East as the oil market is a geopolitical chess game.

The past nine months was a highly volatile period in the crude oil market; the energy commodity took the elevator to the downside in Q4 and the stairs higher in Q1. In Q2 it rallied until late April when selling once again hit the market. Actions by Iran lifted the price from the most recent low.

Open interest in NYMEX futures moved higher over the second quarter. The metric reached a new record high at 2.714 million contracts on May 16, 2018. The metric moved from 1.968 million contracts at the end of Q1 to 2.017 million at the end of Q2, an increase of 49,000 contracts. However, since the peak, the metric declined by almost 700,000 contracts.

Over past quarters I have been writing, “One of the most significant factors that investors need to remember about the developments in the crude oil sector over the past few years is that technological advances when it comes to U.S. shale production have blessed America with a call option on energy independence. The fact that producers can quickly turn on and off the wells in response to price increases and decreases means that the U.S. has become much less dependent on Middle Eastern oil during periods of high prices and political turmoil in the region that can affect production and logistics.” The path of least resistance for the price of crude oil remains a political and economic hornet’s nest.

Brent crude oil fell 34.97% in 2015, and in 2016 it rallied by 49.87%. In 2017 Brent outperformed WTI and moved 19.69% higher on the year. In 2018 Brent moved 19.55% lower compared to the close at the end of 2017 as Brent outperformed WTI for the year. In Q1, Brent underperformed WTI as it posted a 25.61% gain over the three-month period. In Q2, it underperformed WTI as the price slipped by 4.2%. Over the first half of 2019, the price of Brent crude oil was 20.33% higher than at the end of 2018. September Brent futures closed on June 28 at $64.74 per barrel as the August contract rolled to September on the final day of the quarter. Brent traded in a range from $53.47 to $75.59 over the first half of 2019.

Brent’s premium to WTI increased to $8.14 per barrel basis the nearby June contracts up $0.85 per barrel over the three-month period. The Brent premium traded to the highest level since March 2015 at $11.59 per barrel in May. In Q2, the range in the spread was from $6.46 to $11.59 per barrel, and it closed the quarter below the midpoint despite the increased tension in the Middle East and rising US output.

Brent crude oil has traded at a premium to NYMEX crude since the Arab Spring in 2011. Even as violent flare-ups, disputes, and even war continue to plague the region, oil continued to flow. The long-term norm for the Brent-WTI NYMEX spread is a $2-4 per barrel premium for NYMEX crude over Brent. NYMEX crude is lighter and sweeter meaning it has lower sulfur levels making it easier and cheaper to refine into products like gasoline. However, ongoing conflicts in the Middle East and increasing U.S. shale production caused Brent to remain at a premium.

The dollar is the reserve currency of the world and is the benchmark pricing mechanism for crude oil. There is a long-term inverse correlation between the value of the U.S. dollar and commodities prices, and crude oil is no exception. The dollar index moved 1.22% lower in Q2, compared to its March 2019 closing level. However, the dollar index made a new high at around the 98 level before it fell. The decline in the dollar index in June came on the back of a shift at the Fed from a hawkish to a dovish approach to monetary policy. At its June meeting, the FOMC told markets that they project rate cuts before the end of 2019 as inflation was below the 2% target, US economic data weakened, and “crosscurrents” in Europe and Asia were weighing on global growth. The prospects for lower rates caused the dollar to retreat at the end of Q2.

Term structure in both NYMEX and Brent crude can provide some clues as to the supply and demand fundamentals for the energy commodity. A widening backwardation where deferred prices are lower than nearby prices indicates that the market is concerned about the availability of the energy commodity. Contango, where prices of deferred futures contracts are higher than nearby values are a sign of either oversupply or equilibrium where supply and demand are in balance. August 2019 NYMEX crude oil versus the August 2020 NYMEX futures (the one-year spread) settled at a $2.71 backwardation at the end of Q2. The spread tightened by $1.64 per barrel compared to where the one-year active spread was trading at the end of Q1 when it was in a backwardation of $1.07 per barrel. The December 2019 NYMEX crude oil versus December 2020 NYMEX futures spread was at a backwardation of $2.95 as of June 28 compared to a backwardation of $2.63 per barrel at the Q1 as the spread also tightened over the past three months. The tightening of the nearby spread reflects come supply concerns for crude oil. However, an expansion of the US pipeline system could cause the spreads to loosen, and the Brent-WTI spread to decline as more storage and pipeline capacity lowers the bottleneck supply problems in the US.

The Brent, December 2019 versus December 2020 spread closed Q2 at a $2.38 backwardation. Any dramatic moves in the one-year spreads or shape of the forward curve could impact the path of least resistance for crude oil prices in Q3. The forward curves reflect a continuation of supply concerns.

Both WTI and Brent remained over 20% higher at the end of Q2 compared to the end of 2018. A continuation of the bullish price action will depend on a myriad of factors including economic growth, events in the Middle East, US output, and the state of markets across all asset classes. Lower interest rates in the US and a falling dollar provides support for the price of crude oil all commodities, but global economic growth could cause demand destruction for energy commodities.

NYMEX crude oil moved 2.78% lower over the past three months, and the XLE also posted a loss in the second quarter. The ETF which closed at $66.12 on the final day of trading in Q1 and was at the $63.71 level on June 28, a decline of $2.41 or 3.64% over the period. The XLE marginally underperformed the price action in the crude oil market in Q2.

We are likely to see a continuation of price volatility in the crude oil market in Q3 as the situation between Iran and the US is not going away any time soon. The Middle East and even Venezuela are extreme hotspots in the world, and trade between the US and China will determine the health of the global economy. I believe that any price spikes in Q2 are likely to come on the upside because of the tension around the Strait of Hormuz and increasing military presence in the region.


Oil Products Review

Oil products often reflect periods of seasonal demand, but they also are a piece of a complex puzzle when it comes to the price direction of crude oil which is the critical input when it comes to the refining process. RBOB gasoline tends to rally in the spring and summer, and heating oil or distillates tend to do best during late fall and winter.

Both gasoline and heating oil futures tracked crude oil in Q2. Refining margins moved in opposite directions as the gasoline crack posted a marginal loss and the heating oil refining spread moved higher.

Gasoline was down by 13.66% in 2015 but rallied by 31.70% in 2016. Gasoline futures finished 2017 with a gain of 7.28% for the year. Gasoline futures moved 27.49% lower in 2018 compared with the price at the end of 2017. In Q1, gasoline posted a 44.58% gain for the three-month period making the fuel the best-performing commodity of all in Q1. In Q2, gasoline futures moved 0.75% higher.

Source: CQG

As the weekly chart highlights, gasoline traded in a range of $1.3230 per gallon to $2.1559 on the active month contract on the NYMEX over the first six months of 2019 as the fuel entered the peak season for demand. The price pattern on the weekly chart since early 2016 had been positive as gasoline has made higher lows and higher highs. However, seven consecutive weeks of losses ended that bullish price trend in Q4. In Q1, eight straight weeks of gains sent the price back to the highest level since last October. However, the price of gasoline futures moved lower with crude oil after hitting a high during the week of April 22 before recovering after an explosion at a Philadelphia refinery. Nearby futures closed on June 28, at $1.8966 per gallon wholesale.

Heating oil was down by 38.71% in 2015 but rallied 53.88% higher in 2016. In 2017, the oil product gained 19.58%. In 2018, the fuel posted an 18.80% loss for the year. Heating oil futures moved 17.39% higher in Q1 2019. In Q2, heating oil posted a 1.62% loss over the three months. Heating oil futures are a proxy for diesel and jet fuel as the oil products are all distillates and have similar characteristics. Heating oil futures have some seasonal features, but less than gasoline as jet, diesel, and other distillates are year-round fuels.

Source: CQG

The weekly heating oil chart shows a constructive and bullish trend since early 2016. The price carnage in the crude oil market took the price to a low at $1.6424 per gallon in late December on the continuous contract before recovering with the price of oil. The active month contract traded to a low at $1.6107 last December and $1.6215 so far in 2019 before the recovery took it back to around the $2 per gallon level before falling to just above $1.90. Heating oil and all distillate products are highly sensitive to the overall state of the economy.

Nearby heating oil futures closed on the final trading day of Q2 at $1.9394 per gallon wholesale. Heating oil traded in a range from $1.6215 to $2.1377 per gallon over the first six months of this year. Oil products were mixed in Q2 but did not deviate all that much from the price action in the crude oil market.

Crack Spreads Review

The price action in crack or refining spreads shows that both gasoline and distillate fuel price moved with the price of crude oil during Q2.

In 2016, the gasoline processing spread was down only 0.06%, and in 2017 it lost 8.88% of its value. The gasoline crack moved 37.50% lower in 2018 from the closing level at the end of 2017. In Q1, the gasoline crack spread posted an impressive 103.44% gain. In Q2, it was only 0.75% higher as was 129.03% higher over the first six months of this year. The significant increase is a function of seasonality as the summer is the peak season for gasoline demand.

Source: CQG

As the weekly chart shows, the nearby NYMEX gasoline processing spread exploded higher in Q1 as the market looked forward to the season of peak demand. In Q2, the gasoline crack spread retained most of its gains. The nearby gasoline crack spread closed Q1 at $18.92 per barrel and was trading at $21.30 per barrel on June 28 at the end of Q2.

Meanwhile, the heating oil crack moved 83.66% higher in 2016 and 38% to the upside in 2017. In 2018, the heating oil crack spread posted a 5.11% loss on a year-on-year basis since the end of 2017. In Q1, the distillate processing spread fell by 10.12% from its closing level on the final day of December 2018. In Q2, the distillate crack spread rose by 2.35%.

Source: CQG

The weekly pictorial of the heating oil refining spread illustrates that it closed Q2 at $23.08 per barrel. The heating oil crack spread had been under pressure since 2013, but the price action in 2016 and 2017 broke the pattern of lower highs. The processing spread between crude oil and distillates made a higher high in mid-November at $32.53 per barrel before turning lower. However, at $23.08 at the end of June, the refining spread was higher than it was last year at this time as it traded at under $20 per barrel at the end of June 2018.

Crack spreads are real-time indicators for the profitability of those companies that turn raw crude into oil products. Volatility in gasoline and heating oil crack spreads directly impacts earnings of those companies involved in refining oil.

Source: Barchart

As the chart of Valero Energy Corp (VLO) highlights, the stock has moved from $84.83 per share at the end of Q1 to $85.61 at the end of Q2. The rise of only 0.92% reflects the uncertainty over economic growth and recent volatility in both the oil and stock markets. VLO trades at a 13.01 P/E ratio and pays shareholders a 4.29% dividend. While I continue to believe that VLO offers value at its current price level, the potential for volatility in both the oil and stock market has kept me on the sidelines when it comes to the refining stock.

Natural Gas Review

The price of natural gas dropped 32.88% in 2014 and was down 19.11% in 2015. In March of 2016, the price of the volatile energy commodity fell to the lowest level since 1998 at $1.611 per MMBtu. However, in a reversal of fortune, natural gas exploded higher and posted a 60.21% gain in 2016. In 2017, gravity took the price of the energy commodity back down as bearish sentiment and ample supplies weighed on the natural gas futures market throughout the year. In 2017, natural gas futures lost a total of 21.13% of their value compared to the end of 2016. In 2018, natural gas was just 0.44% lower on the year. In Q1, natural gas lost 9.46% of its value compared to the closing price of nearby futures at the end of December. In Q2, the price tanked and fell to the lowest level since 2016 and was 13.3% lower for the quarter and 21.5% lower over the first six months of this year.

Natural gas was a wild ride in Q4 as the price traded to a high at $4.929 per MMBtu in mid-November and then fell like a stone reaching a low at $2.543 per MMBtu in mid-February 2019. Natural gas rallied at the beginning of the peak season of demand late last year on the lowest level of inventories in years, but the price came back down to earth in December and during the first three months of 2019. During the second quarter, the selling continued taking the price to a low at $2.134 per MMBtu in June.

Source: CQG

As the weekly chart shows, the highs in natural gas came in mid-November when a combination of short-covering and cold weather took the price to a lower high at $4.929 per MMBtu. Record production caused some market participants to short the commodity, but low stocks and an increase in demand for power generation, and growing shipments of LNG supported the demand side of the fundamental equation for the natural gas market. Additionally, a pairs trade of long crude oil and short natural gas at the beginning of October as sanctions on Iran and record output of natural gas caused some traders and hedge funds to buy oil and sell gas on spread. The trade wound up being one of the most painful spreads of 2018 as longs scrambled to sell oil and shorts chased natural gas higher in Q4, resulting in significant losses on both sides of the pairs trade. However, warmer forecasts brought the price back below the $3 level by the end of 2018. The selling continued during the first half of 2019. Natural gas picked up a head of steam on the downside as the price fell below technical resistance levels at just above the $2.50 per MMBtu level.

Inventories rose to all-time highs in 2015 when they surpassed 4 trillion cubic feet before the withdrawal season. In November 2016, stockpiles rose to a higher high and a new record at 4.047 tcf. At the start of the 2017/2018 withdrawal season stockpiles of natural gas reached a lower high at 3.79 tcf. In early November 2018, natural gas stockpiles peaked at the lowest level in years at 3.247 tcf which likely led to the rally late last year. At the start of the 2019 injection season stocks of natural gas stood at 1.107 trillion cubic feet, which was 20.5% below the prior year’s level and 33.2% below the five-year average in March. Late in Q2, stocks had risen to 2.301 tcf as of June 21, which was 11.4% above last year’s level, but still 6.9% below the five-year average for the same time of the year. A streak of six consecutive triple-digit injections since early May weighed on the price of the energy commodity.

August natural gas futures closed Q2 at $2.308 per MMBtu. The next level of technical support is at the recent low and at the psychological $2 level. Below there, the March 2016 bottom and the lowest price since the late 1990s at $1.611 per MMBtu stands as the critical technical support.

Open interest in NYMEX natural gas futures contracts moved from 1,171,386 at the end of Q1 to 1,289,412 at the end of Q2, an increase of 118,026 contracts or 10.08% during the second quarter of 2019. The open interest metric hit a new record high at 1,699,571 contracts on October 4, 2018. Natural gas punished shorts in late 2018 and punished longs in June 2019.

Both the supply and demand sides of the fundamental equation in natural have expanded as had the number of speculators participating in the market. The price explosion caused the open interest metric to decline significantly as shorts scrambled for an exit, and longs took profits. With the price falling through technical support, the open interest metric has increased, which is typically a validation of a bearish trend in a futures market. The forward curve in the natural gas futures market continues to point to an overall bearish orientation when it comes to the price of the energy commodity.

Source: NYMEX

While the nearby price of natural gas closed Q2 at $2.308 per MMBtu level at the end of March, term structure in the natural gas market illustrates that the energy commodity was trading at the $2.707 per MMBtu level in January 2020. The highest price on the forward curve is at $3.817 in January 2031, which is significantly lower than the high in November 2018 at $4.929 per MMBtu. In 2016, the price peaked at $3.994 per MMBtu, and during the winter of 2018 at $3.661. In Q4 the price blew through those levels like a hot knife through butter. At the end of Q1, I wrote, “The natural gas curve is telling us that sentiment in the natural gas market continues to be bearish.” Stockpiles of natural gas are rising quickly during the injection season of 2019, and it is possible that we will see them rise to the four trillion cubic feet level or higher by the time they begin to fall in November. The higher stocks climb, the lower the chance for an explosive seasonal rally in the coming winter season.

The shape of the forward curve is an indication of comfort with massive supplies in the Marcellus and Utica shale regions of the United States for the coming years and even decades. Additionally, fewer regulations as a result of the Trump Administrations commitment to energy independence and technological advances in fracking have caused the production cost of natural gas to move appreciably lower.

LNG is the demand vertical for the energy commodity that offsets some of the vast reserves in the Marcellus and Utica shale regions of the U.S. Additionally, many coal-fired power plants have switched to natural gas which has increased demand for the energy commodity that burns cleaner than coal. Meanwhile, LNG shipments could accelerate if the US and China ever agree on a trade deal. Record production of natural gas in the US has led to record demand as the LNG business continues to expand exponentially.

The price range in natural gas has been from lows of $1.02 to highs of $15.65 per MMBtu since 1990. A twelve-year price at below $4.00 became a bargain for a time in late 2018. Natural gas will move into the second half of the year under the most pressure since 2016. However, a continuation of selling throughout the summer months could create bargains depending upon how far the price falls. At below $2 per MMBtu, the market will start becoming interesting from the long side again. Call options for the coming winter season will limit risk while opening up the upside in case of a significant price recovery. As open interest in the futures market rises, a growing number of shorts could find themselves scrambling for exits if the price of the energy commodity decides to reverse to the upside over the coming months.

Keep your eyes on inventory levels over the coming months. The higher they rise, the more pressure we could see on the price of natural gas and the less likely a rally will be next winter season. At the recent rate of injections, it is possible that we will see a new record high in storage going into the 2019/2020 peak season of demand.


In the US, ethanol is a biofuel — a product of corn. The price of nearby ethanol futures fell by 4.24% in 2018. In Q1, the biofuel turned higher and posted a 6.41% gain for the first three months of 2019. In Q2, ethanol prices exploded to the upside, making the biofuel the best-performing member of the energy sector with an 11.9% gain. Ethanol outperformed the price of gasoline but underperformed corn in Q2. The biofuel fell to an all-time low at $1.198 during the final three months of 2018. The price of nearby ethanol futures closed on June 28 at $1.5050 per gallon while corn was 17.88% higher and gasoline moved 0.75% to the upside for the quarter. Gasoline tends to trade at a premium to ethanol, and at the end Q4 2018, the spread was trading at a level where gasoline was at a 3.81 cents premium to ethanol. The spread blew out in Q1 to 53.75 cents, 49.94 cents higher than at the end of 2018. At the end of Q2, the spread stood at 39.16 cents, 14.59 cents lower than at the end of Q1. Ethanol traded in a range of $1.252 to $1.645 per gallon over the first half of 2019 and settled closer to the top end of the trading range.

One of the reasons for the recovery in the price of ethanol was the Trump Administration’s move to lift a summer ban on the sale of gasoline with a blend of 15 percent ethanol or E15. The prohibition had been in place for three decades. However, late planting of corn because of floods across the midwestern US caused the price of the biofuel to follow the grain higher.

Margins for ethanol producers moved lower over the second quarter. The price of the output, ethanol, was up by 11.9% but the price of the input, corn was 17.89% higher which means those companies involved in refining corn into the biofuel paid more for the input and received less for the output on a relative basis. Shares of Archer Daniels Midland (NYSE: ADM), a company that processes corn into ethanol, moved 4.5% lower from the end of Q1 to the end of Q2 2019. The decline in ethanol refining margins likely played a role in the weakness of the share price.

Another issue to keep in mind when it comes to ethanol is the political push for a “Green New Deal.” Rising support from a move away from fossil fuels and hydrocarbons could boost the demand and price of ethanol and other alternative energy products as we witnessed in the second quarter of 2019.

The bottom line on energy

The price of crude oil rose to a higher high in Q2 before trade-related selling in May took the price to just over the $50 per barrel level on the nearby NYMEX futures contract. However, rising tensions in the Middle East pushed the price higher by the end of June. As we head into Q3, Iran and trade remain the two issues pulling the price of crude oil in opposite directions. A lower dollar and falling US interest rates are bullish for the energy commodity, but the steady rise in US output and growing inventories weigh on the price. A global economic slowdown is bearish for the price of oil, but all that may fall by the wayside if Iran continues to provoke the US and Saudi Arabia in the Middle East. The OPEC meeting takes place during the first two days of Q3, and they will likely leave the production but of 1.2 million barrels per day in place given the recent price action. The Saudi oil minister told the world that a “comfortable” level for Brent crude oil is in a range from $60 to $70 per barrel. At the around the $65 level at the end of Q2, Brent crude oil is precisely in the middle of that comfort zone which means OPEC is not likely to tamper with the current level of production by its members.

When it comes to natural gas, the price goes into Q3 after a marginal bounce from the recent low. If the selling resumes, the next level to watch on the downside is $2 per MMBtu. Below there, support is at $1.611 per MMBtu. If natural gas challenges the 2016 low, it could set up some bargains when it comes to both the futures and futures options for the peak season next winter and shares of natural gas producing companies.

The price of coal tends to be a seasonal commodity that follows the price of other energy products.

Source: Barchart

As the chart of the price of August coal futures for delivery in Rotterdam, the Netherlands shows, closed Q1 at $67.35 per ton and moved lower to $51.85 at the end of Q2, a decline of 23% over the past three months after a significant loss in Q1. The price of Rotterdam coal futures underperformed both crude oil and natural gas in Q2, but seasonality played a role in its decline. However, the KOL ETF product which holds shares in many of the leading coal producing companies only fell from $13.53 on March 29, to $13.28 on June 28, a decline of 1.8% which was likely because of gains in the stock market rather than the price action in coal.

The energy sector always offers some of the most exciting and profitable opportunities. Both the global economic and geopolitical landscapes will guide prices in Q3 and for the rest of 2019.

The price of oil is likely to continue to be a function of behind the scenes agreements and arm-twisting in Washington DC, Moscow, and Saudi Arabia with the latter having the least influence on prices given the military positions of the United States and Russia. The situation in the Middle East continues to threaten stability in the region and always has the potential to cause price spikes in the oil market.

International trade is likely to continue to dominate the news cycle over the coming weeks and months. The outcome of negotiations will determine if the tit-for-tat tariffs and retaliation will increase or decrease the risks of a global recession and risk-off period or economic growth. New agreements and compromise on trade could ignite a period of optimism in markets which would support economic growth and higher demand for energy. A continuation of escalation when it comes to protectionism will weigh on energy demand and the prices of energy commodities. Ethanol is likely to continue to follow the corn market throughout the 2019 growing season this summer.

The Vanguard Energy Index Fund ETF Shares (VDE) correlates with the price of crude oil. During Q2, it underperformed the energy commodity, as it declined by 4.88% compared to a drop in the price of NYMEX crude oil futures of 2.78%. VDE holds shares in many of the leading energy commodities in the world, including:

Source: Yahoo Finance

The VDE moved from $89.38 at the end of Q1 to $85.02 at the end of Q2.

Keep those stops tight and take profits when they are on the table in energy commodities, which are excellent trading markets for disciplined traders and investors who approach the markets with logical plans for risk and reward. I believe the potential for significant price volatility in oil and natural gas is high in Q3 based on political factors and the trade situation, which will impact the global economy.

Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment, security, or commodity discussed herein, or any security in any jurisdiction in which such an offer would be unlawful under the securities laws of such jurisdiction.