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Have Markets Reached the Peak of 'Unknown' Unknowns?

When big events happen that disrupt or implode the operating fundamental assumptions, markets move swiftly to 're-price'. Market movements become tangible evidence of new beliefs, the front-line where fear and uncertainty can unite and be expressed. In the absence of concrete data points, people look for validation in price action.

The reality is that we are standing at the peak of the unknown unknowns, where a wide range of future outcomes are given similar probabilities. The front of the market is going to push boundaries in search of price levels that are favorable to opposing convictions (ie, cheaper than liquidation value).

When everything is being re-priced at the same time, there are sectors and parts of the forward curve that lag the front, and those that overshoot the mark. Technical levels and conventional analysis in front-month markets are dwarfed by portfolio liquidation and speculation. So today we ask the question: Are there some parts of the forward curve that have gone along for the ride, and potentially overshot their mark?

First, lets set the stage by reviewing what has happened to overall market over the last few weeks.

  • WTI crude oil prices are below $30/bbl for the remainder of 2020 (green line below), with the following 4 year strips settling below $40/bbl as of last Friday's close.

  • Airline travel has come to a halt and jet fuel prices have collapsed.

  • Monthly crude oil futures spreads have plummeted. Time will tell of the strength of the April/May spread into expiration holds any meaning (navy blue line below).

Potentially Over Shot Their Mark?

The loss of demand as a result of the coronavirus has undoubtedly been expressed in gasoline futures as more and more cities in the US and across the world have adopted stay-at-home policies. Logically, we know this reduces miles driven and therefore, the demand for gasoline. But, if we look at the chart below of summer gasoline crack futures (vs WTI), we see the decline in gasoline refining margins has not only impacted this year's driving season, but also summer 2021 AND 2022. Yet, the response in distillate cracks are relatively muted. In terms of an anomaly, is it reasonable to think gasoline refining margins are permanently harmed for the next 3 years??

Another bone of contention the market has been grappling with is US crude oil economics. This led to wide swings in WTI/Brent spreads, without much impact to recent spread levels.

However, this uncertainty in how the collapse in demand will impact US oil exports was expressed with much more certainty in LLS vs Brent spread futures (since LLS is more representative of crude oil in the US Gulf Coast than WTI). Prior to this, US Gulf Coast delivered crude oil had moved to trade at a premium to WTI at Cushing. The rapid decline the LLS/Brent spreads shows that USGC crude oil is first in line on the chopping block. Keep an eye on this spread as it will turn first.

We see this in the collapse of LLS premiums relative to WTI. In fact, USGC crude oil is now trading below Cushing WTI.

Finally, we touch on the relative strength seen in distillate markets. We know that the market is imploring refineries to reduce their gasoline output as demand has plummeted. US refining capabilities have been touted for their superior capabilities over the years and it can be seen in BP's Refining Marker Margin (RMM).

This complexity can be seen in the higher percentage output of gasoline vs distillate in their US refineries than their simpler refineries in other parts of the world. The relevance of this is that the US can reduce gasoline output faster by reducing refinery runs (it also speaks to why HOGO arbs favor the US).

This dynamic has translated beautifully in the market selloff: markets with the highest production capacity/lowest demand sold off the most (crude oil. gasoline and NGL's) sending a signal to producers to reduce supply. They will also be the quickest to recover.

Inventory Recap

Weekly Stats

We have yet to see the cumulative impact of current events on EIA inventory levels since the reports are not real time. The EIA inventory report for week ending March 13, 2020 reported a total inventory DRAW of (7.30) million barrels with product draws being larger than the 7-year average for this week, but not yet a trend-worthy data point.

Year-to-date, this bring us to a Total Inventory DRAW of (2.10) million barrels. which haven't yet surpassed the total Year-to-Date draws seen at this time last year. Inventory builds are expected to grow significantly going forward as demand remains under pressure.

By comparison, inventory levels for 2020 (black bars) had looked relatively benign in comparison to previous years. With the anticipation of future inventory builds and the US announcing it's intention to reverse course and begin buying oil for the Strategic Petroleum Reserves, everything is now viewed using a different lens.

Lee Taylor - Technical Levels


Resistance: 26.75 – 26.81

Support: 24.99 - 24.52

Brent should test support underneath at 24.96-24.52 with a gap above at 26.75-26.81 created resistance then 28.50. June/Dec brent which has been under pressure, we see resistance above at -6.47 and support underneath at -7.00 to -7.26


Resistance: 26.08 - 26.63 / 27.34 – 27.56

Support: 22.39 / 21.77 / 20.52

Every story out this weekend projects to more of a sell-off. It appears that although every television station is speaking about stimulus packages, the only thing that traders are looking at is the infection rate. May WTI has support below at the following levels – 22.39 then 21.77 and 20.52. Resistance above doesn’t appear until 26.08 (weekly low from 2016) and 26.63. Major resistance lays above at 27.34-27.56.


Resistance: .6205 - .6266 / .6778 - .6878

Support: .6010

It surely seems that April RBOB is certainly overdone technically to the downside. The Relative Strength Index is at 16.25 and has been under 30 since the first sell-off on the March 7-8th weekend. Resistance will be found in April RBOB at .6205-.6266 area then .6778-.6878 with support at .6010. Spreads have been quite choppy – look at April/May which appears to be well supported from -260 down to -300 and resistance up at from -140 up to -125. June/Dec is completely overdone and in some uncharted waters. Resistance lays above at -618 but once again RSI levels have been under the 30 level since March 8th.


Resistance: 1.0010 – 1.0264

Support: .9498 / .9343

The heating oil market will follow the rest of the complex. Support will be found at .9498 followed by .9343 in April Heating oil. Resistance doesn’t appear until 1.0010 then 1.0264. April/May heat has been trying to rally off its lows from a few weeks ago. Look for trendline support of -89 with the objective of -57.


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