There has been a lot to weigh down on WTI this week, so no surprise the price has gone back to where it was back in March. Though at least in the early part of Tuesday, there has been a bit of a rebound. Analysts are still debating whether that’s just a correction on the way down, or a potential bottom after breaking through the $80/bbl handle.
Although commodities in general have been on the backfoot lately, WTI is having a particularly hard time of it. The thing that could worry crude bulls is that some of the issues lining up could be signs that a new trend is forming. Though with how volatile things are in the Middle East, there could always be a surprise.
Being the Leader of the Trend
In the lead-up and aftermath of the FOMC decision, the deck was already somewhat stacked against the crude. There was wide anticipation that the Fed would maintain a hawkish stance, essentially keeping up the tightening for one more month in the hope that inflation would turn around. But data that came out this week, such as ISM manufacturing prices paid and the consumer expenditures index, have pointed to inflation still sticking around.
The subsequent strength in the dollar as yields remained elevated provided a double-punch to crude. On top of the relative price issue, if interest rates remain high in the US, the risk of tipping over into a recession becomes more relevant. The market had largely come to expect a soft landing (or no landing at all) in anticipation of the Fed moving towards easing this year. But now investors are souring on the economic outlook for the largest economy in the world.
Demand is Faltering
The EIA also reported a large build in inventories on Wednesday, sending the price of WTI lower. Though the figure tends to fluctuate a lot (the prior week saw a large drawdown), it was some of the underlying figures that spooked the market. Crude inventories in the US had reached a high not seen since last June. That means as the warm weather would normally encourage Americans to hit the road, it’s possible the continuing inflation problems are hurting consumer demand.
Thus refiners are finding that there is dwindling demand for their products. Last year, refiners were running at or even above capacity, but now they are cutting back runrates. The drop in refining margins is a strong reflection of dwindling appetite for the crude in the world’s largest consumer. Add to that the surprise deceleration in the economy recorded in the first quarter, investors are starting to be a little concerned about the resilience of demand.
Supply Seems Better
The other side of the equation is supply, and with the tensions between Israel and Iran abating, so is the worry that supply might be interrupted. Israel is getting ready to make its final push in Rafah, which is expected to bring the conflict to an end soon. There was some hope of a diplomatic resolution even sooner, as reports of another round of talks came out earlier in the week. That also weighed on oil.
As the price comes down, investors are looking towards the next OPEC+ meeting, believing that the current curtailments will be maintained. But the recent bottom in the price might be attributed to hopes that as the price comes down, the US could return to rebuilding its strategic reserve, which could put a floor on the price of the crude for a while.
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