Did the November sell-off in oil predict a future recession and will the price recovery predict how deep the recession might be, asks Phil Flynn of PRICE Futures Group. 

Sometimes the oil market’s predictive powers can be greater than some of the other indices that we traditionally look at. Even as there has been a very strong seasonal influence that has caused the oil market’s recent price crash and subsequent recovery, you might argue that what we have seen in the market could be a sign of a subsequent weakening of the economy in the future versus a recovery shortly thereafter.

Global markets are still cheering the Fed suggesting that the fastest rate hiking cycle in history has ended. The question becomes is the Fed signaling to the market three rate cuts in the new year because they see a substantial slowdown coming? Is it possible that the Federal Reserve fears that the cumulative impact of interest rate hikes will be felt more acutely next year? The reality is that the market seems to suggest that we will see a bit of a shock with them quickly recovering.

That means of course you have to keep an eye on the stock market indices because if they get extremely overbought and we go parabolic, be prepared for a pretty big correction probably right around October.

Yet that could be a problem for another day as the markets continue to get a big boost. The market seems to be ignoring bad economic data in China perhaps in part because China has gone on a massive stimulus plan that will no doubt increase their oil demand.

The International Energy Agency (IEA) continues to want to bash OPEC in another blow to their already questionable credibility instead of focusing on the job at hand which is supposed to be to ensure energy security so people can afford to not freeze to death and to be able to afford to eat. Yet OPEC is committed to cutting output even if they lose market share. Amena Bakr reports on Energy Intelligence saying that OPEC Plus production was down to 200k in November on the month. Compliance is getting better and member states have vowed to stick to their targets in the coming months. All eyes are on Q1. This market will get tighter.

Based on what I am seeing I have been steadfast in my assumption that we’re going to see the market become undersupplied in the new year even with the Chinese economic slowdown it’s clear that the record amount of stimulus could turn the oil demand up sharply and fairly quickly. We also believe that the incredible increase in US oil production is going to moderate somewhat. That is by no means a bad mark against the US oil and gas industry which continues to produce oil cleaner and better than anyone in the world. The powerful green energy industrial complex is using its growing power and political might to try to undermine fossil fuels. Bloomberg News reported that White House National Climate Advisor Ali Zaidi says the US still needs oil and gas to meet near-term energy demand. But Zaidi says, “We’re rapidly turning that stock over to clean energy.”

Energy Intelligence reports that Credit Agricole said on Thursday it will no longer finance new fossil fuel extraction projects and will also be selective about which companies it does business with during the energy transition. The lender also said it now plans to reduce emissions associated with its oil and gas loans by around 75% by 2030, having previously targeted a reduction of about 30%. CEO Philippe Brassac said, “[We] will not finance any new fossil fuel extraction projects and we will adopt a selective approach to support energy players engaged in this transition”.

Arbab gasoline futures gained pretty dramatically yesterday especially on heating oil even though all the oil products had a great day. The seasonal factors are setting in for oil products and we could see a pretty substantial rise especially because the market is oversold as demand continues to be stronger than expected here in the United States and the outlook going into the new year for the market to be very tight. You should be hedged on these positions. We’ve seen seasonal patterns that suggest that we could see a very strong run-up in the next couple of weeks.

Natural gas is trying to bounce but with the warm temperatures, the weather is not helping out. Now we may see new dynamics on the weather front. Fox Weather (you should download the app) says that  El Nino appears to be on the verge of rapid collapse. Fox Weather explains that “When sea surface temperature anomalies reach 0.5 degrees Celsius (0.9 degrees Fahrenheit) or warmer than what is typical, an El Niño is considered to be underway. An El Niño is one of three phases of the El Niño-Southern Oscillation or what is commonly referred to as the ENSO. The current El Nino event started in June 2023.”

NOAA’s latest forecast now suggests El Niño may be over as soon as April—a month earlier than last month’s forecast. The probability of El Niño conditions remaining in April has dropped from 62% to 37%.

Fox Weather says that the future, the apparent downfall of El Niño, would complicate climate outlooks even further, as the length of the lag between when the weather changes and its associated neutral pattern is a not well-understood concept. A fast-corresponding change would lead to fewer kinks in the jet stream, meaning more regional patterns dominate local weather. A lag in the associated weather would keep El Niño-looking patterns around despite the world not officially being in an El Niño.

A lag is rather common as one pattern transitions into another. The world typically experiences a lag during large-scale events. A neutral pattern typically means a busier spring and severe weather season and hurricane season than typically experienced during an El Niño, but it all comes down to timing. A pattern that flips during the late spring or summer would miss the heart of the severe weather season but catch the hurricane season to show its effects. A pattern change in September or beyond would miss out on impacting the 2024 hurricane season but would be in place for next winter.

Learn more about Phil Flynn by visiting Price Futures Group.