Oil Drifts for Second Consecutive Day as U.S. Inventory Data is Anticipated

By Barani Krishnan

Concerns about the U.S. economy are impacting oil traders, causing hesitation in pursuing long positions in the market. The Biden administration’s efforts to reduce crude prices from recent record highs, potentially through a ban on U.S. crude exports to increase domestic supply, further contribute to this cautious sentiment.

For the second consecutive day, crude prices displayed little movement, with New York-traded West Texas Intermediate settling slightly lower, while London-based Brent post a modest increase. Specifically, West Texas Intermediate for July delivery fell by 52 cents, or 0.5%, closing at $109.77 a barrel, after a minimal rise of just one cent the previous day. In contrast, Brent for August delivery reached $111.16 a barrel by 3:00 PM ET, marking an increase of 38 cents, or 0.3%, after an 87-cent gain in the previous session.

The rise in crude oil prices has decelerated over the past two months, following significant gains prior to April. Meanwhile, fuel prices at U.S. gas stations have surged since March, with gasoline exceeding $4.50 and diesel surpassing $6 per gallon.

The mixed performance in crude prices came as U.S. Energy Secretary Jennifer Granholm confirmed that the Biden administration has not dismissed the possibility of an embargo on oil shipments to address soaring fuel prices. Granholm remarked, "I can confirm the president is not taking any tools off the table."

Analyst Ed Moya from OANDA noted, “Oil prices remain directionless as energy traders try to evaluate the impact of slowing economic activity on short-term crude demand. The oil market remains tight, but the Covid situation in China suggests a gradual demand recovery, likely keeping this market range-bound for a while.”

A steady stream of negative U.S. economic data and concerns about a potential bear market on Wall Street have also exerted downward pressure on oil in recent days. According to recent data, monthly sales of newly-built homes in the U.S. dropped to a two-year low in April, indicating a slowdown in the housing market amid rising interest and mortgage rates.

This decline in new home sales coincides with reports of a third consecutive monthly decrease in existing home sales as interest and mortgage rates continued to rise. Furthermore, the National Association of Home Builders reported that home building sentiment reached two-year lows in early May.

The housing and real estate sectors are crucial to the U.S. economy, with about 65% of occupied housing units being owner-occupied. Homeownership represents a significant source of household wealth, and home construction plays a critical role in employment. The 2008/09 financial crisis serves as a reminder of the housing market’s potential to precipitate economic downturns.

Global economic uncertainties, a key focus of the Davos meeting this week, are also contributing to the oil market’s subdued outlook. China, the largest oil importer globally, is intensifying quarantine measures in response to its Covid outbreak, even as it plans to lift lockdowns in the Shanghai business hub.

Despite these economic concerns, market participants are eagerly anticipating the release of weekly U.S. oil inventory data, which is expected to be published shortly after market closure by the American Petroleum Institute.

The API is set to provide a snapshot of closing balances for U.S. crude, gasoline, and distillates for the week ending May 20. These figures will serve as a precursor to the official inventory data from the U.S. Energy Information Administration, scheduled for release on Wednesday.

Analysts expect the EIA to report a reduction of 737,000 barrels for the previous week, contrasting with the 3.39-million barrel decrease recorded in the week ending May 13. Regarding gasoline, predictions indicate a draw of 643,000 barrels, which would add to the prior week’s decline of 4.78 million barrels. For distillates, expectations point to an increase of 917,000 barrels, compared to the previous week’s gain of 1.24 million barrels.