After weeks of rising, oil prices appear to have lost upwards momentum after the 2 April announcement of voluntary output cuts failed to counter worries about demand linked to a weakening economic backdrop and a hawkish Federal Reserve. Growing fears of a recession due to rising interest rates as well as the risk that Chinese demand could fall short of expectations in the coming months remain a serious overhang on oil prices.
There are also fears that Russian output might not have fallen despite government announcements. There are reports that Russian crude shipments remain strong despite sanctions and embargoes: Reuters reported April oil loadings from Russia's western ports are on track to reach their highest since 2019 at more than 2.4M bbl/day. Previously, Russia's Deputy Prime Minister Alexander Novak announced that Russia would cut production by 500,000 bpd in March, and again in early April promised to extend the cuts until the end of the year. Not even the latest Energy Information Administration (EIA) data has succeeded in shaking the market out of its malaise. Standard Chartered’s proprietary U.S. oil data bull-bear index remained neutral, falling 0.9 w/w to -1.7. The crude oil elements of the data were, however, strong, with counter-seasonal draws in aggregate and at Cushing, while product
Inventory demand figures for April are disappointing. StanChart says that a run of stronger data will likely be needed if Brent is to again test its 200-day moving average of USD 88.50 per barrel (bbl).
Oil prices stayed within the 3 April range for five consecutive days, and 6 April was an extremely rare triple inside day (a third straight day with a range within the previous day’s range) after the initial jump higher. Unfortunately, prices fell below the 3 April low on 18 April after a failed break to the upside, and have since attempted to close the gap on the chart. Many momentum indicators have also turned bearish, with six consecutive lower intraday highs.
A look at open interest provides a good clue as to why oil prices have lost momentum. With open interest across the four main New York and London crude oil contracts hitting a 13-month high of 4,759 million barrels (mb) on 17 April. This was 160mb higher than on 3 April, suggesting that speculative shorts have started piling on, again. Further, commodity analysts at, StanChart says that concern among traders are concerned about the opaqueness of Russia’s data and fear Russia’s output could reduce the effectiveness of OPEC+ cuts
Thankfully, it’s not all doom and gloom with commodity experts at Standard Chartered saying that there has been no dramatic change in fundamental views among traders beyond renewed macroeconomic pessimism. Commerzbank's Carsten Fritsch says that the market has become too complacent in the medium term, and the oil markets will be noticeably undersupplied again when production in Saudi Arabia as well as a number of other OPEC countries is scaled back starting May.
The oil markets have been oversupplied over the past few months thanks to overall weak demand following warmer than expected weather in Europe. The U.S. crude market started signaling oversupply in November, the first time supply exceeded demand in 2022. The front-month spread, traded in contango in November ahead of the December contract’s expiry. Front-month spread is used to gauge short-term supply-demand balances. Luckily, the rest of the market retained a bullish structure known as backwardation, an indication that the bearishness could yet be a short-term one.
Well, the bulls have finally been vindicated with the surplus in U.S. commercial inventories having all but disappeared. After months of providing ominous signals about the global oil market and the health of the U.S. economy, the weekly Energy Information Administration (EIA) report has started sending significantly more positive indicators.
U.S. commercial inventories hit a peak deficit to the five-year average of 151.7 million barrels at the start of June 2022, around the time when oil prices peaked. The deficit was then filled by mid-February in the current year after which a surplus started growing, peaking at 34.7 million barrels about three weeks ago. The surplus then started shrinking to just 1.6 million barrels in the EIA’s latest report, with the U.S. market now appearing to be headed back to deficit territory.
By Alex Kimani for Oilprice.com
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