Crude Crude Crude

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. 

Source: Saxo Group
Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo Capital Markets HK Limited holds a Type 1 Regulated Activity (Dealing in securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged foreign exchange trading); Type 4 Regulated Activity (Advising on securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong

By clicking on certain links on this site, you are aware and agree to leave the website of Saxo Capital Markets, proceed on to the linked site managed by Saxo Group and where you will be subject to the terms of that linked site.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

Please note that the information on this site and any product and services we offer are not targeted at investors residing in the United States and Japan, and are not intended for distribution to, or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. Please click here to view our full disclaimer.