Crude oil should be entering an extended range-trading market. If history is a guide, responsive traders are likely to prevail as the market feels very bullish near peaks and bearish toward nadirs. Natural gas appears to be the opposite — a tight spring that’s ripe to uncoil, with upside potential outweighing downside risks.

A traders delight with crude bull at rest
With the best of the bull-market run complete, in our view, crude oil should remain the domain of responsive traders. Brent’s 2018 high of $86.74 a barrel should represent good resistance for an extended period as the market seeks support. Back toward the halfway mark of the 2012-16 price decline, $10 above or below the $77 level should mark the bell curve of the trading range for awhile. A good support area is $67.

Primary bull-market companions — demand vs. supply and the trend toward backwardation in the one-year futures curve — appear to have peaked from multiyear highs. Prices are unlikely to appreciate more in this environment. Demand vs. supply estimates include data from the Energy Information Administration and the International Energy Agency. The one-year curve is the average for Brent and WTI.

Natural gas taking bull baton from crude oil
Natural gas’ primary drivers — demand vs. supply and the futures curve — indicate upside price opportunity outweighs downside risks. Recovering recently with the market pricing in a winter-weather premium may leave gas a bit vulnerable in the shorter term, but the bigger picture is quite price-supportive. The one-year curve remains solidly in backwardation, which is historically an oxymoron in gas due to the high storage costs. Coincidentally, our index of the primary North American demand vs. supply factors shows the ratio well above par.

Natural gas, typically the most volatile of the major commodities, remains bound to one of the narrowest percentage ranges in futures history (2017 was the tightest). Prices have done little since indicating a market that’s ripe for a catalyst.

Crude oil liquidation, natural gas accumulation
Traders’ exit from crude oil and petroleum positions in favor of natural gas elevates reversion risks. October’s recovery of about 5% in the Bloomberg Natural Gas Subindex coincided with a sharp increase in managed-money positions, achieving the highest level of net longs in the database since 2006. Priced for cold weather should leave the market a bit vulnerable when it comes, with the potential to be less extreme than expected.

Mean reversion in crude oil was October’s predominant energy-performance story, but positive total returns should remain supportive. The Bloomberg Energy Subindex Total Return of almost 13% outpaced about 12% for the spot index through Oct. 29. It’s been four years since energy has posted positive roll returns.

Crude oil should be range-traders’ delight
There’s little room for the crude-oil bull to run, but the downside should also be limited, resulting in an extended range-trading market, in our view. The one-year curve trending into backwardation, a primary bull-market companion, has reached a significant peak and is flat again. Responsive traders are likely to prevail. Traders that held WTI resistance near $75 a barrel are likely to be in force, supporting $65. In the midst of the most significant drawdown since last June’s trough, if that correction is matched, WTI would likely revisit about $60.

It wouldn’t be a first. Since the nadir in 2016, WTI had two 24% drawdowns. The current is 15% to Oct. 24, which has returned the market to the first revisit of the 52-week average in a year. The trend remains up, but key indicators point to a range-bound market.