Oil futures: Brent tumbles from highs as recessionary fears return

18 May 2022

Quantum Commodity Intelligence - Crude oil futures came under strong selling pressure in US trading hours Wednesday, as oil markets followed the weaker trend in equities and broader recessionary fears. 

Front-month July ICE Brent futures were trading at $108.90/b (1755 GMT), compared to Tuesday's settle of $111.93/b and sharply down from Wednesday's high of $114.15/b. 

At the same time, June NYMEX WTI spiked to $109.38/b ahead of expiry, versus Tuesday's settle of $112.40/b, while the more-liquid July contract was trading at $106.71/b. 

Markets also shrugged off the latest weekly data from the EIA which revealed total US crude oil stocks fell to their lowest since January 2005 and gasoline stocks fell to a fresh year-low, with domestic demand at a two-month high and product and crude oil exports both higher.

However, US domestic crude throughput overtook the five-year average for the first time in a month as refiners took over 15.9 million bpd of crude – its highest since early April – which helped ease concerns over the crunch in gasoline and diesel supplies. 

Prices had been higher for much of the day as growing optimism that Shanghai is emerging from widespread lockdowns balanced out reports that the US may relax oil sanctions on Venezuela.

Shanghai achieved its long-awaited milestone of three consecutive days with no new Covid-19 cases outside quarantine zones on Tuesday, although most businesses remain under restrictions.

Prices had also come under pressure late Tuesday after the Associated Press reported Chevron was given the green light to speak to Venezuela, although uncertainty over the status of EU proposals to ban Russian oil kept the market in a heightened state of volatility.

"Oil prices have remained near multi-week highs this week, supported by surging gasoline and distillate prices in the US, and fears around an EU ban on Russian oil imports remaining in play. If markets start pricing in peak-Shanghai-lockdowns, that will be an additional supportive tailwind for oil prices," said Jeffrey Halley, senior market analyst at Oanda, commenting on the earlier price rally.

The EU is now set to meet at the end of the month to push Russian embargo proposals over the line, although some EU members are likely to be granted longer transition periods.

Meanwhile, supply fears resurfaced with OPEC+ production retreating sharply in April as Russia and other alliance members continued to fall further behind on output targets. Overall, OPEC+ produced 2.6 million bpd below its target in April, with compliance rising to a record 220% from 157% the previous month.

Russia's oil output stood at 9.16 million bpd in April, down about 860,000 bpd from March and falling at the fasted rate since the collapse of the Soviet Union.

The American Petroleum Institute (API) reported a 2.45 million barrel draw in crude stocks last week, while gasoline inventories dropped 5.1 million barrel and distillate stocks were up 1.1 million barrel.