Oil Market Boosted by Positive Earnings and Fuel Demand Growth

Oil prices experienced a boost last Friday with Brent and WTI crude both rising over 2%. This came after energy firms reported positive earnings and U.S. data indicated a decline in crude output and a growth in fuel demand. Brent futures for June delivery settled at $79.54 a barrel, up 1.5%, while the more actively traded July contract increased 2.7% to settle at $80.33. Meanwhile, U.S. West Texas Intermediate (WTI) crude rose 2.7% to settle at $76.78.

Despite these daily gains, both Brent and WTI posted a second consecutive week of decline with Brent experiencing a fourth straight monthly drop due to disappointing U.S. economic data and uncertainty over interest rates affecting the demand outlook. This was acknowledged by Phil Flynn, an analyst at Price Futures Group, who stated that the market was down due to concerns about a potential economic recession and the expansion of the banking crisis with First Republic Bank.

However, there have been recent developments in resolving the First Republic problem with the U.S. Federal Deposit Insurance Corp (FDIC), the Treasury Department, and the Federal Reserve among the government bodies coordinating talks with financial companies to find a solution. The Energy Information Administration (EIA) data also showed a decline in U.S. crude production to 12.5 million barrels per day (bpd) in February and a rise in fuel demand to nearly 20 million bpd, its highest since November. Inventories of U.S. crude oil and gasoline also fell more than expected last week as demand for motor fuel increased ahead of the summer driving season.

Oil companies such as Exxon Mobil and Chevron reported strong demand and held the line on cost-cuts implemented during the COVID-19 lockdowns. However, crude prices have declined in recent months due to worries about interest rate hikes reducing demand. Brent declined 3% this week after falling 5% last week, while WTI slipped 1% this week after losing 6% last week. Despite this, WTI experienced its first monthly increase in six months, gaining 1% in April.

The oil market has been closely monitoring U.S. inflation which continues to accelerate, leading to expectations that the Federal Reserve will keep raising rates and potentially causing a demand-sapping recession. This has been further compounded by Russia's resilient supply despite Group of Seven sanctions and China's slower than anticipated rebound. On the other hand, top Chinese refiner Sinopec has reported that China's recovery will boost demand growth for refined oil products by more than 10% this year.

Earnings for the oil industry in the first quarter exceeded expectations with companies such as Exxon Mobil and Chevron experiencing profits not seen since oil prices topped $145 a barrel in 2008. The price of WTI crude oil futures has extended to the upside, breaking above its 100 hour moving average. However, there are concerns about the market's ability to hold these gains, which may suggest weaker demand for energy going into the summer.

The relationship between the WTI futures contract and the RBOB crack spread, which reflects the profit margin of refiners, could also lead to further weakness in the WTI market if profitability decreases for refiners. The move lower in the WTI futures contract saw a slight increase in volatility, but it remains relatively subdued, suggesting the market is not overly concerned about this pullback. It remains to be seen whether buyers can maintain control and stay above the 100 hour moving average, but a failure to do so may result in more momentum to the downside.