Crude oil futures fell for the third week out of the last four, as investors worried that weaker global growth, higher interest rates and COVID-19 lockdowns in China will hurt demand.
WTI crude for June delivery (CL1:COM) closed -4.1% for the week to settle at $102.07/bbl, while June Brent (CO1:COM) ended the week -4.5% at $106.65/bbl, and U.S. natural gas (NG1:COM) finished the week with a 10.5% drubbing at $6.534/MMBtu, pulling back after hitting 14-year highs on Monday.
“Fears over China’s growth and overtightening by the Fed, capping U.S. growth, seem to be balancing out concerns that Europe will soon widen sanctions on Russian energy imports,” Oanda’s Jeffrey Halley said.
Federal Reserve Chair Jerome Powell on Thursday said a 50-basis point rise in U.S. interest rates will be on the table at next month’s policy meeting, which pushed the dollar to its highest levels in more than a two years.
“All else equal, higher rates are traditionally bearish for dollar-denominated commodities like crude,” says Schneider Electric’s Robbie Fraser, noting that markets are unsure whether the Fed will get it right, raising interest rates to tame inflation but without triggering a recession.
China’s demand for gasoline, diesel and aviation fuel in April is expected to drop 20% from a year earlier, Bloomberg reported, as Shanghai and other major Chinese cities are in strict lockdowns.
Oil demand is shedding 1.4M bbl/day as a result of lower global economic activity, with a rebound unlikely until at least 2023, Rystad Energy said Friday.
But Morgan Stanley raised its Q3 Brent price forecast by $10/bbl to $130/bbl, with a ~1M bbl/day deficit persisting throughout the year due to lower supply from Russia and Iran, which likely will outweigh short-term demand headwinds.
“Risks to prices are skewed to the upside,” Morgan Stanley said, seeing “a high risk that the EU will enact an import embargo for Russian crude, although it would probably be implemented with a lengthy grace period of 4-5 months.”
“There’s a certain point at which we will find support because the fundamentals here are just too tight for things to slide very far,” according to Mizuho’s Robert Yawger.
The energy sector (NYSEARCA:XLE) held steady for most of the past week before succumbing in Friday’s broad stock market weakness, closing -4.5% for the week; still, energy is this year’s best performing S&P sector, up 37% YTD, as crude oil remains ~35% higher so far.
The week’s top 5 gainers in energy and natural resources: (BKEP) +38.6%, (HPK) +23.2%, (SMLP) +15.6%, (WFG) +12.7%, (WTI) +12.7%.
The week’s top 10 decliners in energy and natural resources: (UEC) -29.2%, (INDO) -26.9%, (BTU) -24.6%, (CENX) -24.4%, (METC) -24.2%, (UUUU) -23.4%, (HUSA) -22.8%, (HTOO) -21.3%, (TELL) -21%, (HNRG) -20.7%.