This week’s price action in the crude oil, unleaded gasoline and natural gas markets had one thing in common. They all featured the return of volatility. Both the fundamentals and the technical chart patterns all indicate that volatility is likely to remain high over the near-term.
The week began with January West Texas Intermediate crude oil futures underpinned by expectations that the OPEC-led agreement to cut production would be extended beyond the March 2018 deadline. This event has been driving the market higher for several weeks.
Last week, we raised concerns about whether speculators would be able to sustain the rally since OPEC and the other major producers including Russia would not be making a decision on the extension until November 30 when the group meets in Vienna, Austria.
We were primarily concerned that the hedge funds and commodity money managers would exhaust their buying spree before the date. In other words, it would turn into a “buy the rumor, sell the fact situation.”
Concerns were eased a bit early this week when prices surged to the upside due to geopolitical events in the Middle East. Major arrests in Saudi Arabia due to a crackdown on corruption and an escalation of tensions between Saudi Arabia and Iran helped drive prices to nearly a two-year high.
These events contributed to the first shot of increased volatility. The second phase was generated by a mixed government inventories report.