While West Texas Intermediate crude oil is the primary ingredient in gasoline refining, the slightly heavier Brent crude oil with a higher sulfur content is the ingredient in distillate processing. ICE Brent crude oil for November delivery was trading at around a $3.83 per barrel premium over the NYMEX WTI November crude oil futures on September 6.
Meanwhile, the continuous heating oil futures contract plunged around 60% from an all-time peak in April 2022, reaching bottom in May 2023 at $2.15 per gallon wholesale. The price has recovered to over $3 per gallon in early September; the factors that pushed prices to record highs in 2022 remain intact. The potential for an explosive rally in heating oil is a clear and present danger as the oil market heads into the fall and winter.
Heating oil prices correct and rebound
The war in Ukraine sent N.Y. Harbor heating oil futures prices to a record $5.2217 high in April 2022. The price climbed over nine times from the 58.0 cents pandemic-inspired low in April 2020, the lowest level since March 2002.
The chart shows the rise to the April 2022 high, which ran out of steam at over $5 per gallon wholesale. Heating oil futures fell 58.8% to the $2.15 level in May 2023, where they found a bottom.
Heating oil followed crude oil prices to the May 2023 lows, as nearby WTI futures prices reached a low of $63.57, and the continuous Brent futures fell to a $68.20 per barrel bottom in May. Crude oil and the oil product turned higher and have been in bullish trends since the May 2023 lows.
The trends in crude oil and heating oil are bullish
The October heating oil futures chart highlights the bullish trend since early May 2023.
The chart illustrates the 48.7% recovery from $2.2174 to $3.2966 per gallon wholesale on August 25. Prices remain near the recent high at the $3.14 level in early September.
The NYMEX crude oil chart for October delivery highlights the 36.4% rise from $64.58 on May 4 to $88.07 per barrel in early September.
Meanwhile, Brent crude oil futures for November delivery climbed 28.6% from $70.88 on May 4 to $91.18 in early September.
The trends in the two petroleum benchmarks and the products that reflect distillate prices were bullish in early September.
Brent is critical- OPEC+ controls Brent prices
Brent’s slightly higher sulfur levels and composition make it the petroleum of choice for distillate refining. Brent is the pricing benchmark for two-thirds of the world’s crude oil, reflecting supplies from Europe, Russia, Africa, and the Middle East. It is also the petroleum OPEC+, the international oil cartel, influences by its production quotas. The bottom line is OPEC and Russia have significant control over the Brent benchmark price. Given Brent’s requirements for distillate refining, the cartel influences distillate prices.
The all-time high in heating oil futures before 2022 was at $4.1586 per gallon in 2008, the year WTI and Brent prices climbed to record peaks. While the petroleum benchmarks fell short of the 2008 highs in 2022, heating oil moved over 25% higher than the 2008 level. Russia’s involvement in OPEC caused distillate fuel prices to soar.
In September 2023, there is no end in sight to the ongoing war in Ukraine, and relations between Russia and countries supporting the Ukrainians continue to deteriorate. Moreover, Saudi Arabia and other OPEC members have been selling crude oil to China for yuan and India for rupees, bypassing the U.S. dollar and signaling the end of the petrodollar era. Crude oil has become an economic weapon, which makes it susceptible to sudden supply issues and explosive price moves.
Chinese economic recovery could cause heating oil to soar
China and India are the world’s most populous countries, and China has the second-leading economy. Over the past months, Chinese economic growth has been sluggish, leading to lower energy demand. OPEC+ cited Chinese economic weakness as justification for production cuts, but the cartel’s mission remains the highest possible price that balances supply and demand fundamentals. Therefore, the OPEC+ would rather sell less oil at higher prices. Tensions with the U.S. and Europe are considerations for production cuts, and Russia’s use of traditional energy as an economic weapon is another factor for the cartel’s policy decisions.
Meanwhile, a recovery in China could tilt petroleum’s fundamental equation in the current environment, suddenly causing prices to surge back towards the 2022 levels. Crude oil prices have been trending towards the $100 per barrel level, and the U.S. Strategic Petroleum Reserve remains at the lowest level in decades. The U.S. does not have the capacity to sell crude oil barrels to keep a cap on prices as it did in 2022.
The technical levels to watch in the NY Harbor heating oil futures contract
Heating oil futures have made lower highs since the 2022 record peak. Meanwhile, the oil product futures are approaching a level that would end the bearish trend.
The ten-year chart illustrates that technical resistance to end the downward path of least resistance stands at the January 2023 $3.58 per gallon high, under 25 cents above the August 2023 continuous contract peak. A move above that level could ignite a technical rally that takes prices back above the $4 per gallon wholesale level.
Higher heating oil, jet, diesel, and other distillate fuel prices could be on the horizon as the technical trend has turned higher with support from the geopolitical landscape in September 2023.
On the date of publication, Andrew Hecht did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
