World oil demand is significantly weaker than widely perceived
Well, this is perplexing. Crude fundamentals are bearish.
Only a couple of weeks ago, markets went haywire after OPEC announced an unanticipated additional output cut of 1.16 million bpd. Markets surged. There were talks of crude touching highs of US$100 a barrel, even though nothing much had changed in the markets. Supplies were unchanged from the previous month’s level, and the new OPEC output cuts were only set to come into play in May.
Nevertheless, there were tremors. Prices touched the mid-US$80 barrel level, with speculation market prices were set to touch the three-digit level soon – especially since the summer driving season was around the corner. Speaking with BNN Bloomberg, Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners, had said the price of oil was set to surge in the months ahead despite the risks of a global recession.
But now, the markets seem to be taking an altogether different route. Oil wiped out almost all the gains that stemmed from OPEC+’s output cut. Brent crude wiped out nearly all of the US$7 it gained after the Organization of Petroleum Exporting Countries and its allies pledged to cut production further. By the end of the week, Brent posted a weekly loss of 5.4 per cent, while West Texas Intermediate (WTI) fell 5.6 per cent.
And according to Bloomberg, global gasoline markets were slowing rather than ramping up or even peaking, while diesel demand, an essential indicator of industrial activity, is also lagging in both the U.S. and Asia. Meanwhile, a U.S. economic report signalled the economy has stalled in recent weeks, casting an additional cloud over risk assets and energy demand prospects.
Indicating a slowdown in demand, the U.S. gasoline inventories also went up last week by 1.3 million barrels to 223.5 million barrels, according to a recent U.S. Energy Information Administration report.
“It appears that some of the excitement around the OPEC+ cuts have faded, amid light flows,” Bloomberg said, quoting Emily Ashford, Executive Director of Energy Research at Standard Chartered.
Economic uncertainty and the prospect of rising interest rates are also affecting oil markets. The primary driver of the decline in oil prices is the widespread apprehension surrounding the possibility of an economic recession.
Worrying economic data in the U.S. has added to the pressure on crude markets. The number of Americans filing for unemployment benefits increased last week, suggesting that the labour market is cooling.
“At the end of the day, one of the big reasons why we’re sliding is fear of recession,” Bob Yawger, executive director of energy futures at Mizuho, told Reuters.
Last Wednesday, Tom Kool reported that the Federal Reserve released its Beige Book, which indicated that banks are tightening lending standards due to uncertainty and liquidity concerns in the aftermath of the collapse of Silicon Valley Bank (SVB) in early March. Consumer spending was also perceived as flat.
Uncertainty over demand, especially for the upcoming summer driving season, continues to weigh on traders’ minds, said Andrew Lipow, president of Lipow Oil Associates in Houston. “The market is still under pressure with concerns about demand,” Lipow told Reuters.
Rising interest rates to control inflationary trends have helped cool down the markets. The U.S. Federal Reserve, the Bank of England and the European Central Bank are all expected to raise rates when they meet in the first week of May.
The strengthening of the U.S. dollar has also aided the drop in oil market prices. “The crude benchmarks are posting … lows … in response to a strengthening in the U.S. dollar that is, in turn, weighing on risky assets following some hot inflation data out of Europe,” Reuters quoted analysts at energy consulting firm Ritterbusch and Associates telling customers in a note.
“We still believe that the market has been too focused on the supply side of the global oil equation following the OPEC output cuts and that world oil demand is significantly weaker than widely perceived,” the note said.
True to its colours, the oil business remains as unpredictable as ever.
By Rashid Husain Syed
Toronto-based Rashid Husain Syed is a respected energy and political analyst. The Middle East is his area of focus. As well as writing for major local and global newspapers, Rashid is also a regular speaker at major international conferences. He has provided his perspective on global energy issues to the Department of Energy in Washington and the International Energy Agency in Paris.