How Diesel Is Pushing Rates Higher and What It Means for Stocks

This is a special look at light crude and uh the diesel market. That's for SLHO. That's heating oil and uh low sulfur diesel. The upside pressure may not be over for diesel. And that's important. And I'm going to show you something and there is an amazing correlation to interest rates. So if you want to know what the um fortunes are for the stock market, you really have to understand how the interest rates are affected by diesel. And right now we see interest rates certainly affecting the stock market. And I'll show you all of that. First I'm going to start out by looking at uh these energy markets. Then uh we're going to look at uh a few stocks that are being affected here. And then uh later on in this show and if you're watching this clip then you'll want to go to look at the uh section of the stock market as I continue the analysis. So let's first look at the light crude market. This is uh not the light crude market. Uh so we'll go to for CL and then we'll look uh here. The question is uh in this chart uh how much will it keep going up and what are the present conditions and are we starting to look at the potential for demand destruction. Now we have a unique situation going on here where um we have a uh oil price that's been strong, diesel prices that are at a record and also interest rates at a high that we haven't seen for more than two decades. That brings the question, how much can the economy take uh from the squeeze of higher interest rates and higher energy and the overall effect on uh inflation. So this is the light crude weekly chart and we're going back here uh to 2021. So, we have about just over uh four years here that we're looking at. And all I have here is uh just looking at the bar chart and our momentum indicator uh which is the reversal scout. That's this one right over here. And you see where it turned up when oil was at around 70 and of course moved up over a 100 as you have this powerful upward momentum. This right over here is the um 34W week moving average which doesn't mean a lot here. So I'm just I'm going to hide that right now uh so it doesn't uh get in the way of the analysis. So you can see in here the weekly chart of CL. Now let's you know get this picture here of the fact that it made this big spike up to near 120 and uh now it's gotten up to about 106 in this move and did not make a new high. Now let's look here at the diesel market. Uh that's for SLHO and you can see here what's happened is that well momentum turned up at the same point but of course this went to a significant new high and a record high for diesel and it's all over the news is all of the questions about uh what has pushed this price up and I'm going to talk about that in a moment uh and then we will get a better feel for what this means to all the markets. So, let's go back to the uh to the weekly CL chart right over here. And I'm going to overlay our analysis on here. And you will see all of a sudden what pops out are the cyclical patterns and our annotations. And you can see the amazing rhythm that's in here. And of course, cycle analysis is uh a strong part of what we do along with our proprietary momentum indicators. And you can see in here this important low area and this important low area and this important low area. And these are the big harmonic families that you can see in here. And they're divided by half and then divided by half again. And these are these beautiful rhythms of the half cycle right there. And you can see in here where it got down to the 78.6% at this halfway point. Usually when you have all three going down, you're in a period where there is some pretty good downside pressure in this market or in all markets where this aligns. And uh you can go to our website asklim.com to the top of the page, go to workshops and you can watch a free video on cycle analysis that will help you. Now you can see in here that this rally um is not yet up to that 78.6% 6% but getting pushed up pretty significantly by the geopolitical issues that we have. So what this says to me based on this chart is that there may be some waffling down over here and then probably another attempt to the upside and then the biggest corrective period comes out here into next year. So this quarter that we're in the fourth quarter could actually see some range trading and possibly some higher prices in there. So that's light crude on an intermediate basis and uh just powerful upside momentum and a structure now that says maybe range trade but likely not a big move to the downside. So let's move back uh to the um heating oil market on the weekly chart for/ho. And now let's bring in the analysis here also for you to see. And this is significant. So, what we're looking at in here is that this diesel market has gone up to a new high. And uh this is the green dash here is the light crude patterns that I showed you. And the black one in here is actually a slightly offset um or out ofphase uh uh cycle analysis for HO or for heating oil and diesel. Now, there there's some important messaging in here. I'm just going to get a little tighter look in here so that you can see it. And that is this diesel strength is coming from multiple things. We have post pandemic capacity destruction. So after the pandemic, there was a lot of the uh refiners that uh had to shut down and there's much less capacity. Now there's even worldwide less capacity. Russia is a big exporter of diesel. Ukraine has damaged the refineries and that's probably not over. So there's a shortage there in the amount of diesel also. US distillates are uh or their reserves for the dist distillates are at a multi-deade low. So there's uh not only a shortage of refining capacity, but there's also a shortage of actual reserves in the distillates. And of course the SB release which occurred by both President Biden and President Trump because they wanted to push down prices. That's not what it was for, but they did it anyway. Well, remember that's crude oil, raw crude oil. It's not distillates. So even if they tried to push prices down, well, that would not hurt. That would not move the diesel price down because you're only releasing some light crude into the market. And that of course is hurting trucking and farming etc. and uh or travel. There's just so many things that are being affected by that uh in uh the uh fact that there's a shortage of diesel and that might actually continue. Now let's take a look here. I'm going to look at something shocking. This is a daily chart of heating oil that I'm moving in here right now. And that blue line right over there, that comparative line that you see there, that is 10-year rates. How is that? You have the cycle analysis on here, which is really neat to see because there's a a a beautiful rhythm uh that we see in there. And these are the harmonic families in there. And there's kind of a one-third cycle that you see. And uh that so that cycle length is 45 bars. And the minor one is 15 bars. That's the like that's the uh heating oil diesel um patterns that we have in there. And you see this little dip in here is about where it was expected and now it's trying to move up again. This is interest rates. Can you imagine what does this tell you? Well, are interest rates going up dictating the price of diesel? Not likely. But diesel movements do dictate the price of interest rates. And you can see going all the way back over here into early in the year, look at how these patterns match. It's just crazy. And what that tells you is that right now interest rates going up. You have a condition where um diesel prices should be moving up again. But you can see in here actually diesel's just a little bit softer in this last week, but we would probably expect it to continue moving up again. So you have this condition where a shortage of diesel causes an inflationary condition which causes interest rates to go up. So these 10-year rates are getting ahead of what the Fed is going to try to do or have to do. And you can add into that the massive amount of borrowing that is necessary from several sources. And specifically if you look at the demand uh from AI and the infrastructure buildout uh and the AI is now moving up again and that's uh simply because the um they had a pretty good size downside move and now you have this big move in Meta uh which is uh you know moving the semiconductor stocks up. So you have that group moving up right now. But there is something else going on that's important and that is when you look at the con the contrast of the um interest rates to the Russell and I I'll show the Russell cycle analysis a little bit later in later in the show. Look what's happening here. You have interest rates going up and the small caps getting crushed. The weakest indexes of all. And that usually you know what happens and you can see back over here when the economy looks good and interest rates are drifting higher usually get a condition where the Russell keeps going up. Uh you see that you got this big upside move right over here and the Russell kept moving up but something is changing and this is a signal to me this is the canary in the coal mine. This is telling me that the situation has changed and that interest rates have finally gotten to a level and maybe combined with with uh energy prices, specifically diesel, that it is now going to affect earnings. And that's why you have this softness coming in into the Russell much weaker than the rest of the market. So that's a a good look at these comparisons to interest rates and it tells you a very important story uh when you look at that. So I I I just don't want to ignore the the fact that when you look at this diesel market which is up at a record well lower uh uh lower prices for oil and that could happen is not a fix. If anything it improves margins for refiners. It's going to take years to rebuild this broken transmission mechanism that we see here in this market. You want to see the truth about that? Well, I mean, what happens if oil prices go down at all? I mean, it's going to really help the margins and the markets know that. Look what Valo did, which is a refiner. Look at that crazy movement here in this. Yeah, it might get a corrective period in here, but I think if there's a dip in here, Valaro is still a buy. It had this breakout here. You could see at 187. It got up to 419. So, yeah, I'm showing this late, but I'm showing you what's going on overall and how these prices have affected certain stock groups. Uh, MCP, which is another refiner. Uh, no, sorry, that's MPC. It's an another refiner, and you can see that right over there. Really the same story there. likely to have some pullback but I think that it's going to really continue and you can see in here the same thing Sinclair that's dino d I n o a refiner the same type of action you could see the cyclical patterns in here and uh the likelihood that there is going to be continued upside move here after any kind of a pullback so you know what it uh what did it negatively affect I mean this is I think a major top in carnival cruise um there are major users of marine diesel and that's why you have this major top here. You can see that head and shoulders look and probably falling out into next year. You can see also let's just look at a trucker JB Hunt JBHT. You can see that right over here likely to keep falling well into next year. Uh all of this a very negative picture when you look at that. And uh let's just look at the Dow Jones transportation average uh because of course that would be affected and you're seeing here the breakdown right over here. It broke underneath this cycle support level right over there and now points to deline continued decline prices and you can see in here the value of that reversal scout. It turned down right over there and it has continued pushing with downward momentum that you could see at that point. So that's that's an important look at what I think is an amazing comparison to what's going on in heating oil uh compared to light crude. Why that upside pressure is probably not over that crazy correlation to interest rates. And if you want to know what interest rates are doing, you just have to know what diesel is doing and how the stock market has felt it. And I'll show you a little later on in the show what the conditions are right now for the stock market and the fact that it could actually feel more of these higher interest rate pressure and higher energy pressures negatively affecting the market, but it may not be quite the time yet. We'll take a look at that in a moment. And if you're watching the clip, as I said, well, make sure you head over to the stock market clip uh so you could see how I continue the analysis.