The pullback is evident across the oil market. Gasoline futures are down 18% this week. Meanwhile, physical oil differentials have narrowed and Brent’s prompt spread — the difference between its two nearest contracts and a gauge of supply — shrunk to $1.73 a barrel in backwardation, down from more than $6 a week ago.
“Crude broke several technical levels in a week that has been a bloodbath for super-cycle believers,” said Rebecca Babin, a senior energy trader at CIBC Private Wealth Management. “The action, however, indicates that this was more of a buyers’ strike than meaningful position reduction, as buyers are content to sit on the sidelines until the broader narrative around demand improves.”
After surging in the first five months of the year, crude’s rally has been thrown into reverse, with losses deepening this month after declines in June and July. The selloff, which has been exacerbated by below-average trading volumes, may alleviate some of the inflationary pressures coursing through the global economy that have spurred central banks including the US Federal Reserve to hike rates.
The shift to tighter monetary policy has stoked concern among investors that growth will slow, imperiling the outlook for energy usage. The Bank of England warned that the UK is heading for more than a year of recession as it raised borrowing costs, while in the US, a procession of Federal Reserve speakers pledged to continue an aggressive fight to cool inflation.
China has also shown signs of weakness, clouding the outlook for crude consumption in the top importer. Recent data showed factory activity shrank, while China Beige Book International warned the economy was deteriorating.
Still, there were some signs of bullishness with Saudi Arabia this week boosting its prices, and OPEC+ warning of scant spare capacity. Saudi Aramco increased its Arab Light grade for next month’s shipments to Asian refineries to a record $9.80 a barrel above the Middle Eastern benchmark. Traders and refiners had expected an even bigger jump.