Oil is beginning to dramatically decouple from Natural Gas and Diesel as the EU attemts to cap Russian oil exports, China is heading towards a recession. Diesel stockpiles are now the lowest since 2008 as a brutal winter could descend over the Northern Hemisphere.
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The oil price has collapsed over 20% since November, now in bear market territory. On two points. 1. China losing control of COVID outbreaks since July as it battles the BA.5 variant and the XBB variant/s. Which is extraordinary, considering that when COVID first appeared in China, the country faced over 6000 cases in 2020, two years later China is averaging over 25000 a day. With a variant soup hitting the world from from all directions and the West now restrictionless, this non seasonal respiratory pandemic was not going to just disappear overnight. As vaccines are way behind the curve in their tweaking for the newer variants and I am very pro vaccination/s; it all just a fumbled mess.
So, what began with China is now starting again with China, that we may not lockdown like we did in 2020, we are 100% going to feel China's lockdown as the country most definitely will fall into a recession. That in turn will affect us not any deflationary way, despite the oil price falling, but as a stagflation beatdown via continued misaligned supply chains that are now morphing into supply shortages, eg. You can order lot of one component and less of another, which won't end up completing the final product. So the supply crunch is still here.
The other issue relating to the falling oil price is how Russia will response to the price cap implemented by the European Union which at thus point can't agree on a figure, which I would say may fall around $70 a barrel. With Ukraine calling for $40, Russia could send natural gas prices higher and cut production dramatically to boost oil back up over $80. This energy price volatility will continue on and so will decoupling in energy markets, it will be something we haven't seen before.
Chart 1. Although slightly messy (price tags and forecasts), shows the crude price ascension and descension in the last 12 months. The current price is heading towards the $72 resistance line and its November/December 2021 trading ranges and low at $69. I am very doubtful that the price will fall under $70.
Chart 2. Shows the decoupling of the Diesel and oil price, in Futures trader speak if the higher Diesel price price overshoots future contacts, it's known as backwardation. Which in turn is prompting companies to sell diesel from the U.S. at these 'premium' prices, all the while Diesel stockpiles are being run down to 2008 lows. You can have a oil price decouple and hit $50 a barrel, but it Diesel stocks are down and the price is up, you'll feel it. Namely, if you are a Northern Hemisphere person living in subzero temperatures, your heating bills will be enormous and/or their might not be enough heating oil for residential; with trucks and transportation coming to a grinding halt. Very serious.
Note also natural gas and electricity at all time highs.
Chart 3. Diesel stockpiles in the U.S. at 2008 lows
Note also natural gas prices and electricity rates at all time highs.
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