Crude oil futures dipped on Thursday, reaching their lowest level since late March. The move also turned the broader markets lower for the week. Crude oil is now testing an area it gapped away from upon the announcement of an OPEC+ production cut. The primary driver of the decline in oil prices is the widespread apprehension surrounding the possibility of a global economic recession.
Earlier in the week as prices dropped, some analysts thought the weakness was attributed to the market pricing in the OPEC+ output cuts. However, as the selling pressure intensified following a series of bearish indicators, it became apparent that traders were pricing in a possible recession and the prospect of lower petro demand.
Weakening Economic Activity Naturally Signals Lower Fuel Demand
According to some of the latest data releases, there has been a moderate increase in the number of Americans filing for NEW claims of unemployment benefits, which may indicate an uptick of a slowing down labor market. The most recent numbers from Thursday showed that initial claims in the U.S. rose slightly to 245,000, while the previous week was revised to reflect 1,000 more claims than were previously reported.
Additionally, a separate report from the Philadelphia Fed showed that factory activity in the mid-Atlantic region fell sharply to its lowest level in almost three years in April, with manufacturers in the area expecting activity to remain subdued for the next six months.
The housing sector is also experiencing similar trends, with existing home sales declining by 2.4% to a seasonally-adjusted annual rate of only 4.44 million units last month, after having increased in February for the first time in over a year.
These downward sloping trends are likely related to a year of interest rate hikes by the Federal Reserve, causing concerns about a decline in fuel demand. U.S. rate futures currently reflect a nearly 90% chance of a 25 basis-point increase next month, with a roughly a 69% likelihood of a pause in June.
Gasoline Inventories Tick up, Implying Demand is Dropping
According to the EIA’s report this past Wednesday, gasoline inventories unexpectedly rose by 1.3 million barrels to 223.5 million barrels last week, while implied gasoline demand dropped by 3.9% from the same period last year to 8.5 million barrels per day. While crude stockpiles fell by 4.6 million barrels, analysts believe this decline could be temporary, as it was due to a spike in crude export activity that may reverse this week.
Russian Oil Ports on Pace to Reach Highest Loading Levels Since 2019
Sources in the trading and shipping industry indicate that oil loading from Russia’s western ports are likely to achieve their highest levels since 2019 this April. Furthermore, Pakistan has placed its initial order for discounted Russian crude under a new agreement, which could include upwards of 100,000 barrels per day, according to the country’s petroleum minister.
Crude Suffers Effects of Equity Markets After Slumping Tesla Results
In addition to apprehensions regarding fuel demand, crude prices are also being impacted by the equity markets this past week, which often move in sync with oil prices and were adversely affected by poor results delivered from Tesla among other corporations.
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