Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
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Crude oil responds to signs of slowing US demand
Ole Hansen
Head of Commodity Strategy
Summary: Crude oil remains rangebound on a continued battle between macroeconomic focused traders, selling “paper” oil through futures as a hedge against recession, and the physical market where price supportive tightness remains. In addition, however, the market has seen some early signs of demand destruction among US motorists after data on gasoline demand showed a surprise and counter seasonal drop last week.
Crude oil remains rangebound but on track for its first, albeit small, monthly loss since last November. During the past month persistent supply concerns have increasingly been countered by a prolonged lockdown in China and not least emerging concerns that aggressive rate hikes by central banks around the world will eventually hurt growth and demand for key commodities such as fuel products.
Emerging demand concerns have already been the culprit behind the steep declines seen recently across industrial metals, most recently copper which trades down 13% on the month. The energy sector meanwhile has so far managed to avoid getting caught up in this correction phase due to an extraordinary tight supply outlook. Fortress crude oil however did come under some pressure yesterday amid signs of slowing US gasoline demand.
The weekly inventory report from the US Energy Information Administration showed US crude stockpiles, despite massive injections from Strategic Petroleum Reserves (SPR), falling to their lowest seasonal level since 2014 while stocks at Cushing, the important delivery hub for WTI crude oil futures dropped to 21.3 million barrels, also the lowest since 2014. The market impact, however, came from finished motor gasoline supplied data which showed that US demand for gasoline is succumbing in a more substantial way to record high gasoline prices.
Implied gasoline demand on a four-week rolling basis fell last week to 8.93 million barrels per day, the lowest seasonal level since 2014 except for the 2020 pandemic-led collapse. Gasoline demand from US motorists normally does not peak until the end of the summer driven season around early September and seeing a divergence this early in the season points to slowing demand. A development backed up by a recent survey saying American’s planning on taking a holiday by car in the next six months has dropped to the lowest seasonal level in four years.
Record high refinery margins – or so-called crack spreads - which reflect the profitability of refining a barrel of crude oil into products such as gasoline and diesel responded to the report by coming lower. At current levels, they remain well above historical averages, a reflection of the continued tightness in the refined product market.
The fact crude oil futures only recorded a relatively and not unusual price reversal within the established ranges highlights the continued risk of higher prices due to persistent tightness, due to sanctions against Russian shipments and not least many producers struggling to increase production despite the prospect for high revenues at current prices.
We still believe – and fear – that worries about demand destruction will be more than offset by supply constraints. OPEC+ meet today, and already trailing their own production target by 2.7 million barrels per day, the group is expected to rubberstamp another small but illusive production increase, thereby completing the reversal of output cuts made at the start of the pandemic in 2020. What lies ahead for the group will be crucial, but with most producers being close to maxed out, we are unlikely to see a surprise additional supply response.
In the short term, however, we will see a battle between macroeconomic focused traders, selling “paper” oil through futures and other financial products as a hedge against recession, and the physical market where price supportive tightness remains. A battle that for now and during the upcoming peak summer holiday period when liquidity dries out, may see Brent crude oil trade within the established range between $100 and $125 and perhaps the even tighter one between $110 and $120.
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