The price of gasoline in the U.S. hit an all-time high on Tuesday as the national average spiked $0.17/gallon from last week to $4.37/gallon, topping the previous all-time high set March 8. The European Union’s discussion of pulling back from buying Russian oil has sent additional shock waves through an already strained oil market, with the imbalance between supply and demand likely to get worse as more countries follow the U.S. in banning Russian oil. In sharp contrast, the crude markets have been incredibly volatile and full of wild gyrations.
So far, energy investors have been largely spared from the broader equity market selloff, with the sector emerging as the best performer amongst the 11 U.S. market sectors. But the bulls recently faced their first major scare in months.
Monday was a very rough day for the U.S. stock market as concerns over China’s economy, oil demand, Fed tightening, and inflation triggered one of the worst trading sessions of the year, with the S&P 500 falling 3.2%. The energy sector fared even worse, with the broad index of energy stocks Energy Select Sector SPDR ETF (XLE) falling by 8.3% on Monday, on pace for its worst trading day of the year and weakest performance since falling 9.4% on June 11th 2020.
On Tuesday, crude oil fell below $100 per barrel Tuesday, down ~3% on the day, and back to levels last seen in April. Fearing the worst, several producers anticipated production cuts during Q2, including ConocoPhillips (NYSE:COP), Chevron (NYSE:CVX), BP Inc.(NYSE:BP), Shell (NYSE:SHEL), W&T Offshore (NYSE:WTI), Pioneer Natural Resources (NYSE:PXD), Diamondback Energy (NASDAQ:FANG) and Hess Corp (NYSE:HES).
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But the markets bounced back on Wednesday: Brent Crude was trading at $106.20/bbl at 10.45 am ET, good for a 3.7% gain, while WTI was changing hands at $104.00/bbl, a 4.3% jump.
Once again, the bulls appear to be back in control thanks to growing fears of a Russian oil embargo by the EU as well as China’s economic stimulus. According to Chinese Premier Li Keqiang, Beijing will roll out an array of policies aimed at kick-starting China’s economy this year, including a tax-cut stimulus package of “no less than 2.5 trillion yuan ($400 billion). At the same time we are prepared to roll out a series of financial and pro-job policies”.
However, some market experts are warning that the oil markets are not out of the woods yet.
Recession Fears Could Cap Oil Price Gains
According to commodity analysts at Standard Chartered, whereas oil prices have tumbled from their recent intra-week highs, the w/w price fall is actually relatively modest compared to the falls seen in other commodities, particularly base metals and iron ore. This suggests that oil could decouple from industrial metals and remain elevated above USD 100/bbl, even in the face of growing fears of a recession in the U.S. and Europe as well as a sharp slowdown in China.
StanChart notes that oil prices have not been particularly recession-proof in the past except when (as in the 1970s) the recession was primarily caused by oil prices. However, the increased influence of top-down macro-led money funds in the oil market in recent years has made the oil markets even more sensitive than before to general macro sentiment.
According to commodity analysts at Standard Chartered, crude oil prices would still be well below USD 100/bbl if Russia had not invaded Ukraine, with the war responsible for adding ~USD 20/bbl. The key issue is then to what extent the disruption of Russian oil flows could offset the adoption of a more cautious risk-off mood across asset markets over the next few months.
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“Individual EU country actions are likely to keep flows from Russia low and the countries asking for exemptions are relatively small consumers. Further, if sanction packages were to be weakened significantly, alternative mechanisms such as a tariff or a minimum price for Russian oil would keep the flow suppressed. A more significant threat to prices would emerge if market consensus became concerned that, while inventories are chronically low and there are significant dislocations in key oil product markets, the crude oil market would be relatively balanced in terms of supply and demand flows even if Russian exports fell sharply,” StanChart has said in its latest commodity report.
StanChart has warned that this week’s release of monthly reports by the main international and national oil balance forecasters is likely to move consensus towards deeper concerns on demand weakness and short-term oversupply.
The International Energy Agency (IEA) report is due for release on 12th May, the OPEC Secretariat report is due the same day, and the Energy Information Administration (EIA) ‘s STEO report was published on 10 May. The IEA’s April report put the q/q reduction in Russian output in Q2 at 2.34 million barrels per day (mb/d), with a further 380,000 bpd q/q decline taking output down to 8.65mb/d in Q3. The commodity experts say that due to the current lack of EU consensus, there is a risk that the IEA will spread the decline in Russian output over a longer period, thus loosening the implied short-term balance.
The other key downside risk that might arise from the monthly reports is further significant downgrades to 2022 demand growth forecasts. StanChart’s 2022 forecast of global oil demand growth currently stands at 1.078mb/d, about 360,000 bpd weaker than a month ago. The April reports from the key agencies all showed significantly higher demand growth than Standard Chartered forecast: the IEA forecast was 1.87mb/d, the EIA forecast was 2.41mb/d, and the OPEC forecast was 3.67mb/d.
StanChart has predicted that all three agencies will cut their demand growth estimates in their May reports.
Maybe there’s a reason to be cautious, as StanChart admonishes.
The American Petroleum Institute “API” latest data on crude inventories was bearish, with inventories increasing by 1.6mb, relative to the Department of Energy’s expectation for a draw of 0.5mb on the week. Then, on Wednesday, the EIA recorded a crude oil inventory rise of 8.5 million barrels in the week to May 6, compared with a build of 1.3 million barrels for the previous week, causing oil prices to slip slightly in the immediate aftermath.
By Alex Kimani for Oilprice.com
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