Soft Demand Leaves Resistance Hanging Over Prices

CRUDE OIL 

While May crude oil has held last week’s low to high recovery of three dollars early today, significant headwinds from soft demand should leave thick resistance hanging over prices. Clearly, with US equities showing aggressive declines this morning, energy prices will see macro pressure as a global slowing theme resulting from trade war fears seems to be gathering momentum. In addition to fears of slackening demand and the potential return of idled OPEC+ production, next month, crude oil prices are also undermined this morning from news that Saudi Arabia had to reduce their selling price of oil in Asia for the first time this year. In fact, Chinese oil imports in the first two months of the year declined by 3.4% versus 2024 for a drop in daily imports of 520,000 barrels per day. It should be noted that fears of weakness in China expanded last week in the wake of news that overall Chinese imports dropping by 8.4% and following a CPI contraction of 0.2%! While the market should see a gradual seasonal expansion of US refinery activity and Cushing Oklahoma oil inventories remain very tight, US product markets are generally well supplied into the shoulder season demand slump which could mean this year’s seasonal refinery climb will be less significant. In a longer term negative, there were reports over the weekend that Iran shipped 3 million barrels of crude oil from a storage facility in China to avoid sanctions, which they will use to replenish their customers in Asia, which is weighing on energy prices. The Baker Hughes US oil rig count was unchanged at 486, two below the 5-month high from late February. Energy Secretary Wright said it would take $20 billion and several years to fully refill the Strategic Petroleum Reserve (SPR), which at last week’s EIA report was 395.313 million barrels.

NATURAL GAS

While the natural gas market is explosively overbought from a two-day low to high rally of nearly $0.80 and overbought from a seven day rally of $1.13, the last COT positioning report showed the spec’s still holding a net short of 54,130 contracts! Therefore, from a technical perspective, a significant portion of recent gains have likely been short covering and probably not fundamental long term buying. However, in addition to an emerging pattern of tightening US supplies (the past two weeks have seen inventories holding at 11% below five-year average levels) with EIA working gas in storage still in the sharp seasonal drawdown window. However, seasonal demand should begin to moderate with the last weekly natural gas draw-down of 80 BCF, the smallest weekly draw this year. While imports of natural gas/LNG into North Asia have been positive, recent customs data showed an 8.1% decline in Chinese LNG imports in the first two months relative to last year.

PRODUCT MARKETS

The product markets remain subdued as they closed Friday with sizable daily and weekly losses. RBOB and ULSD have followed through to the downside and are close to their 2025 lows, with moderate losses early this week. US import tariffs remain unsettled after this week’s “flip flops” that continue to pressure RBOB and ULSD prices as they erode the prospects of near-term demand. Average US retail “pump” prices for regular gasoline reached a 4-week low this week, underscoring lukewarm near-term driving demand. However, the May gasoline contract appears to have found value at $2.10 but will be fighting a seasonal up trend in US refinery capacity. According to a private projection, US oil refiners’ capacity is expected to increase this week by 85,000 barrels per day.

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