John Kilduff
Partner,
Again Capital LLC

The monthly employment data for August earned a positive spin in most quarters. On the release, this sentiment was punctuated by triple-digit gains in the equity markets coupled with a sizeable move up in Treasury yields, especially the ten-year note. The upward revision in the two prior months and a net job loss figure that was short of some of the trading community's greatest fears drove this conclusion. The energy markets were less sure, however, and oil prices quickly faded, yielding to a more sobering take.

Much has been written and discussed, rightly so, about the record amount of total petroleum inventories in the United States that currently exists.

Long ago, I freed myself of the yolk of relying on inventory levels as a primary predictor of future price action. It is important to recall that U.S. crude oil inventories were at record levels the month before prices neared a $150 per barrel in 2008, and robust inventories have been with the market for some time — to no avail or solace for energy bears.

I believe, however, that the current situation has become too big ignore, and represents a formidable headwind for petroleum prices, and will ultimately cause prices to cascade lower in the coming weeks.

In order to discount the supply fundamental, the futures market needs positive or even hopeful economic data from the U.S., Europe, and China.

U.S. employment data is among the most critical economic input for deigning petroleum price action. Going back to 2008, recall the horror of drivers in America, as they paid over $4.00 per gallon. Until the bottom fell out of the economy, gasoline demand remained strong, as the U.S. maintained what was considered full-employment.

Drivers felt the pain, but had the cash from their jobs to fill 'er up.

The market certainly wants to be optimistic.

The ability of the ISM manufacturing number, earlier in the week, to get the positive vibes flowing was notable. The muted reaction of the energy market to the August employment data was as notable. It is signaling the reality that demand will remain weak, as driven by employment levels, and the record petroleum inventories will not be worked off with any alacrity.

The $70 per barrel price level is a critical support point for crude oil, and it looks to be challenged in short order. The positive take on the employment data will give way to the realization that we have a long way to go, and we may even be going in the wrong direction.

For now, this is what matters most. 

John P. Kilduff is Partner at Again Capital LLC. He's also a CNBC contributor.