May 6 / Victor Arduin

Energy Weekly Report - 2024 05 06

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"However, the main driver of the price correction was US monetary policy. The Fed's statement regarding the "lack of further progress on there are inflation target in recent months" impacted the commodities market, including energy assets like oil. "

Macroeconomics dominates the oil market sentiment

  • EIA data showed a significant increase of 7.3 million barrels in US commercial crude oil inventories, partly driven by higher imports. This higher domestic crude oil availability helps to ease concerns about a tight market.
  • On the macroeconomic front, inflation concerns are putting pressure on crude oil prices as interest rates may remain higher for longer. The strengthening of the dollar, which makes oil more expensive, coupled with demand fears, has added bearish volatility to the market.
  • However, there are bullish forces in the market that could emerge in the coming weeks. New events in the Middle East may drive premiums in oil prices. Additionally, OPEC's upcoming meeting may confirm the extension of voluntary production cuts.


The prices of major oil benchmarks fell last week to their lowest levels since March 2024. The downturn reflect a number of factors, including rising U.S. crude oil inventories, market expectations from Fed monetary policy, and easing geopolitical tensions in Middle East.

Furthermore, refined product demand remains sluggish. Gasoline consumption, despite a small uptick last week, remains below 9 million bpd. Similarly, middle distillates demand fails to mirror the ongoing recovery in US manufacturing.

Despite the recent downturn in crude oil prices and its products, upcoming events could strengthen the energy market. In the short term, tensions in the Middle East could reintroduce risks premiums. There's also the possibility that OPEC+ will extend its production cuts beyond June, further contributing to a supply deficit in the world this year.

Image 1: US - Comercial Crude Oil Stocks (z-scores)

Source: EIA, Hedgepoint
Note: the numbers are the standard deviation away from prior ten-year average

Image 2: Comparing WTI to the Fed Funds Target Rate

Source: Refinitiv

Oil prices fall, reflecting macroeconomic data

US - Four-Week Average Crude Exports & Imports (Million Barrels)

Last week, EIA data showed a 7.3-million-barrel increase in the country's crude oil inventories. One of the reasons for this bearish outcome was the rise in imports, averaging 6.8 million barrels per day (bpd) over the last four weeks, 3.6% higher than the same period last year. With greater domestic availability in the world's largest oil consumer, the market sentiment for a tighter balance supply/demand balance is diminishing.

Also, refined products have not shown an improvement in demand so far. Gasoline implied demand rose last week by 2.32% but remains below 9 million barrels per day (bpd). Meanwhile, middle distillates have not reflected the ongoing recovery in U.S. manufacturing. The only bullish fundamental is that stocks are below 5-year average. But in the lack of more demand, it will gradually be converting into a bearish factor.

However, the main driver of the price correction was US monetary policy. The Fed's statement regarding the "lack of further progress on there are inflation target in recent months" impacted the commodities market, including energy assets like oil. The interest rates at current levels increases recession risks, support the dollar in the short term, and make dollar-denominated commodities more expensive. In essence, this painted a bearish picture for the market, which experienced a weekly drop of more than 6%.

Source: Refinitiv

Bullish developments could emerge to the market

Israel may soon begin its attack on Rafah soon, leading to increased tensions and uncertainty about how other regional actors, especially Iran, will respond. Since a large portion of Middle Eastern oil passes through the Strait of Hormuz, any military attack in the region, or even the threat of one, could lead to a sentiment of probable disruption in oil supply among traders, consequently driving up prices. Therefore, some of the premium could return to crudes futures.

The next OPEC+ meeting is just a few weeks away, and the group will decide whether to extend the current voluntary production cuts of 2.2 million barrels per day (bpd), with Saudi Arabia accounting for 1 million bpd of that total. With oil prices at current levels, there is growing pressure to maintain current production levels.

Additionally, OPEC members have agreed on a compensation plan to address their overproduction of oil in the first quarter (January-March) of this year. According to data, Iraq and Kazakhstan respectively overproduced by 602,000 bpd and 389,000 bpd. In other words, there will be slightly less oil available to the market in the coming months.

Image 4: OPEC Reference Basket (US$/bbl)

Source: Refinitiv

In Summary

Crude oil prices fell significantly last week, reflecting concerns about the global economy and weakening demand. The Federal Reserve's tight monetary policy, with its current high interest rates, is likely to continue pressuring oil demand in the near future.

While US inventory levels drew attention last week, the real concern lies in the lackluster demand for refined products. This subdued demand could shift in the coming weeks, potentially due to EIA revisions.

For the upcoming weeks, if the next Fed meeting brings a more dovish view on inflation, aligned with the extension of voluntary cuts by OPEC+, this could mean a significant increase in the prices of major oil benchmarks from their current levels.

Weekly Report — Energy

Written by Victor Arduin
Reviewed by Livia Coda


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