Crude Defies Expectations This Spring

Momentum is about defying expectations.

And we’re witnessing this not only in the broader markets and in individual companies, but also in commodities.

Over the past month, crude has gained more than 10%.

Now, I’ve written in a couple articles this year that a bottom in crude is signaled and a reversal is underway when the S&P Volatility Index closes higher than the price of crude. Another indicator is when the gold-to-oil ratio gets completely out of whack.

Both of these took place in late January and the first half of February, just when crude had fallen to a low of $26.

That’s when I knew U.S. crude would turn around. So that’s when I moved to being bullish on the price of U.S. crude.

And that brings us to where we are now, with a double-digit gain this month for WTI.

Is that really significant? Is it just short covering that’s providing a momentum boost to oil?

Well, over the past 30 years, a monthly gain of 10% or more in crude has occurred 37 times. That means it’s not particularly rare.

And the last surge of 10% or more for WTI was in April 2015.

But here’s the other interesting tidbit… Of those previous instances of double-digit gains in a month for U.S crude, six of them took place in March, four in April and four in May.

That means 38% of double-digit jumps occurred in those three months. WTI typically doesn’t collapse at this time of the year. This is when it rebounds.

When we look at the average monthly gain for WTI from February 1986 to February 2016, we see that there tends to be a definite surge that plays out in crude every year…

And this makes perfect sense.

In general, during the spring, investors shift their focus from the previous year’s malaise to first quarter results and the possibilities that lie ahead.

That’s exactly what’s happening now.

As we enter into spring, the market turns toward the summer driving season and vacations in the United States. That means refineries that were shut down for maintenance season at the beginning of the year start back up again. This increasing demand for crude, in turn, drives the price of WTI higher.

Over the last week, the consumption of crude by refineries increased to 16.2 million barrels per day – an increase of 414,000 barrels. And the refinery utilization rate went above 90%. This means more than 90% of refinery capacity is in use.

At the start of March, refinery inputs were 15.7 million bpd, with a utilization rate of 88.3%. At the beginning of February, the utilization rate was 86.6%.

Historically, refinery utilization bottoms in February, then ramps up as it nears the summer driving season.

Shifts in momentum to the downside in oil will typically begin to appear in June and July.

So it may seem like crude is defying expectations by bouncing off lows instead of heading lower. But the reality is that this is the time of year when momentum changes direction… whether it’s for the short term or long term.

Good investing,

Matthew