Oil Is Correcting Despite Concerns Over Rates and Crude Demand

Oil prices continued to fall on Thursday as investors anticipated further interest rate hikes from the US and European central banks to fight inflation, which could weigh on growth and demand for crude oil.

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With crude oil stuck in the inflation narratives of both Eastern and Western regions, weighing on prices of the two global crude benchmarks (Brent and WTI), commodity investors have no choice but to hedge against the risk that central banks will continue to raise interest rates, slowing the economy and lowering demand for gasoline.

U.K. Consumer Price Index (CPI) YoY

As we saw in the UK this week, the level of inflation remained hovering above 10% in March, according to figures released on Wednesday:

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On the other side of the North Sea, European Central bank (ECB) President Christine Lagarde warned last week that even if inflation in the euro zone should continue to fall in the coming months, there remained significant uncertainties.

So, the market anticipates a new rate hike by both the Bank of England (BoE) and the European Central Bank (ECB).

And on the West side of the Atlantic, investors expect several speeches from officials of the U.S. central bank (Fed) on Thursday to better assess the trajectory of rates, at the next monetary policy meeting in early May.

On Wednesday, Fed officials had already reiterated their commitment to controlling inflation, a new strong signal given through a hawkish tone in favour of a hike in borrowing rates next month.

U.S. Crude Oil Inventories

Commercial crude oil inventories fell massively last week in the United States, according to figures published on Wednesday by the American Energy Information Agency (EIA):

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During the week ended April 14, commercial reserves fell by 4.6 million barrels, while analysts expected a drop of just 1 million barrels.

But the extent of this contraction is even more significant as at the same time the U.S. strategic petroleum reserves (SPR) have also decreased, by 1.6 million barrels – the latter are now at their lowest level for nearly 4 decades (November 1983).

Technical Charts

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Chart, histogramDescription automatically generated WTI Crude Oil (Continuous) Futures (daily bar chart)

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WTI Crude Oil (CLM2023) Futures (June contract, 4H chart)

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WTI Crude Oil (CLM2023) Futures (June contract, 30m chart)

In the next episode, let’s talk about refineries, gasoline consumption and demand in the United States.

(To be continued…)

Stay tuned!

Sebastien Bischeri,
Oil & Gas Trading Strategist