Oil Hit Weekly Gain as Rising Fuel Demand Offset Broader Economic Fears

Oil set its fourth straight weekly gain as product markets remain tight amid strong demand, eclipsing concerns about an economic slowdown that have roiled financial markets. 

West Texas Intermediate rose to settle above $113 a barrel, after fluctuating in a session where equities slid closer to a bear market, weighing prices. Despite the choppy trading, oil posted its best run of weekly increases since mid-February. Rising demand for motor fuels and shrinking inventories ahead of the summer driving season underscored a fundamentally tight supply situation even as broader economic fears shook equity markets.

“There continues to be a disconnect between the risk financial markets associate with crude financial assets and the physical market that is trying to digest SPR releases to meet product demand,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. “This dichotomy keeps markets fragmented and volatile - it could end up being a cruel summer for energy traders.”

Crude has surged almost 50% this year, also helped along by Russia’s assault on Ukraine that sent shock waves through markets. While the US and UK have announced bans on Russian exports, flows to Asia have picked up. China is seeking to replenish strategic stockpiles with cheap Russian oil even as officials grapple to suppress Covid-19 outbreaks. India has also boosted purchases. 

There were mixed signals from China on Friday. While banks cut a key interest rate for long-term loans by a record to bolster a slowing economy, Shanghai found the first cases of Covid-19 outside quarantine in six days. It raises questions on whether the easing of the city’s lockdown will be impacted.

Prices:

• WTI for June delivery rose $1.02 to settle at $113.23 a barrel in New York.
  • WTI for July, which has greater volume and open interest, rose 39 cents to settle at $110.28
• Brent for July rose 51 cents to settle at $112.55 a barrel
  • The global benchmark’s prompt spread, the difference between its two nearest contracts, widened to as much as $2.59 in backwardation -- a bullish pattern -- compared with $1.80 a week ago

Traders are also keeping a close eye on refined products market, as a a global crunch on inventories coincides with entering the summer driving season. On Wednesday, US crude data revealed continued market tightness with gasoline inventories falling to the lowest since December and a pickup in demand.

Oil’s jump has contributed to the fastest inflation in decades, prompting the US Federal Reserve to vow that it’ll go on raising interest rates until there are clear signs that price pressures are easing. That’s spurred wild shifts in investors’ appetite for risk, swinging equity, bond and commodity markets.

(with assistance from Paul Burkhardt)