Oil Futures Slip in Rangebound Trade Amid Demand Concerns

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange ended lower Tuesday in rangebound trade after early gains on Monday proved fleeting, snuffed out by central bank officials indicating they need to see more data showing inflation is moving towards the Federal Reserve's 2% inflation target before reducing interest rates.

A slight improvement in the Consumer Price Index for April briefly raised hope that the Federal Open Market Committee would accelerate efforts to ease monetary policy by lowering the federal funds rate more quickly. Yet, Fed officials this week noted more tightening was needed to lower inflation, with CPI up 3.4% year-on-year in April.

High interest rates and the cumulative effect of inflation held back discretionary spending in April, as well as consumer purchases on big-ticket purchases including appliances. These factors have led to a slowdown in refined fuels consumption, which has been under pressure on both sides of the Atlantic Ocean.

The market will have an opportunity to dig deeper into the thinking by central bank officials Wednesday afternoon with the release of the FOMC minutes from their April 30-May 1 meeting.

June West Texas Intermediate futures expired down $0.54 at $79.26 bbl but did pare earlier losses to end the session above the 100-day moving average, now $78.75 bbl, for a fifth straight session. July WTI settled at a $0.60 bbl discount to the now-expired June contract.

July Brent settled under the 100-day moving average, now at $83.58, for the first time since Thursday (5/16), settling down $0.83 at $82.88 bbl. The prompt spread narrowed to $0.18 bbl backwardation, the lowest premium for the front-month contract since early January.

Brent's premium to WTI has narrowed in May as the geopolitical risk premium in oil prices spurred by fear over a widening war in the Middle East in April dissipated while spare capacity held by the Organization of the Petroleum Exporting Countries is wide at 5.52 million bpd, according to the International Energy Agency. Extra crude capacity held by OPEC, not to mention growing production by Guyana, Canada, and Brazil, are seen as enough supply to ease price pressure and tame volatility.

Domestically, markets see commercial crude stocks to have drawn down 2 million bbl during the week ended May 17, according to a Wall Street Journal poll, which would mark the third consecutive weekly decline in inventory. The market eyes greater demand for crude from U.S. refiners as driving the drawdown, with domestic refiners lifting their crude inputs 1.9% during the week ended May 10 to a 16.255 million bpd 17-week high, data from the Energy Information Administration shows.

June RBOB futures held above the $2.5124 20-day moving average Tuesday with a $2.51 gallon settlement, down $0.0299 on the session, pressured by sagging demand in recent weeks. An announcement by the Department of Energy on Tuesday to liquidate the one million bbl Northeast Gasoline Supply Reserve by June 30 in 100,000 bbl batches added to the bearishness for the gasoline contract despite the upcoming Memorial Day weekend.

June ULSD futures slipped back below the 20-day moving average, now at $2.4756, with a $2.4623 gallon settlement, down $0.0248 on the session.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne