It is turning into a week horribilis for oil bulls. Prices see-sawed throughout much of yesterday before closing deep in the red for a second straight session. Brent and WTI settled more than $3/bbl lower on Tuesday, taking this week’s losses to almost 10%. That is because the underlying economic malaise is still there. Concerns that China’s economy is slowing, worries about inflation, growing recession risks, a strong dollar and the Ukraine war are putting a downer on the outlook for the global economy. This, in turn, is feeding worries about oil demand growth prospects.

At the same time, the EU is struggling to agree on a comprehensive oil embargo on Russian oil. Efforts are being hindered by internal disagreements. The proposal needs the unanimous backing by all 27 EU countries but members that are heavily dependent on Russian energy are not playing ball. A case in point is Hungary. The bloc’s trouble child is holding out for more generous exemptions and investments needed to modernise its energy system. Each day that goes by without a breakthrough on the latest EU sanctions package against Russia provides a lifeline for those betting on lower oil prices.

Returning to the demand front, it was always a question of how much, not if, the EIA would trim its demand outlook in its latest monthly forecasts.  Sure enough, the agency downgraded its global oil demand growth estimate for this year by 200,000 bpd, citing slower global economic growth. It is now pencilled in at 2.22 mbpd, down from last month’s forecast of 2.42 mbpd, The EIA also expects lower supply growth this year, chiefly due to persistent production declines in Russia. But it also downgraded US crude oil production forecasts. Supply is expected to average 11.91 mbpd in 2022, down from last month’s estimate of 12.01 mbpd.

The downgrade on both sides of the oil equation produced a somewhat offsetting effect, so much so that the EIA left its Brent price forecast unchanged from last month. Consequently, it still expects the European crude benchmark price to remain above $100/bbl for the rest of 2022.

The oil market is regaining ground this morning as bottom pickers enter the fray. In today’s session, the focus will be squarely on the US. Inflation data for April and a weekly update concerning oil stocks will be front and centre of trader sentiment.  Overnight, the API data showed US crude stocks rose by 1.6 million bbls last week. Gasoline inventories increased by 823,000 bbls, while distillate stocks climbed by 662,000 bbls.

Quiet times

Commodities markets thrive on volatility, but as always there is a case of too much of a good thing. Oil prices have spiked in recent weeks in the wake of Russia’s invasion of Ukraine. The average daily range on Brent and WTI reached $5/bbl last month while the monthly range came close to $20/bbl. Simply put, April was a choppy month for the oil market.

Such was the extent of these wild price swings that it had an adverse impact on trading activity. Exchange data for April shows that CME WTI average daily volumes (ADV) stood at 826 million bbls, down 34% from the previous month and the lowest since December 2020. It was a similar story for the European crude benchmark. ICE Brent ADV stood at 834 million bbls in April, a month-on-month decline of 30% and the lowest since December 2020.

There are no prizes for guessing the main actors behind this lull in trading activity. Speculators were far less active than usual in repositioning their portfolios. Bullish bets on CME WTI shrunk by 2% in the four weeks to April 26. Over the same period, net speculative length in ICE Brent rose by a measly 4%. Hedging activity was similarly subdued. Shorts held by producers & merchants in CME WTI and ICE Brent fell by 1% and 2% respectively during the same period.

A by-product of the wild volatility in oil prices seen recently is the sharp increase in margin calls. Market players have been grappling with unusually large margin calls to cover hedges taken out for future sales. This dramatic increase in funding requirements has made it risky and expensive to maintain existing positions or initiate new ones. Those struggling to finance margin payments have been forced to scale back their activities to conserve cash. This explains why the total number of open ICE Brent futures positions fell to a multi-year low of 1.9 billion bbls at the end of April. In sum, the liquidity strains associated with margin calls were on full display last month.

And the onset of May has failed to bring a reprieve from the trading lethargy. ICE Brent ADV has averaged 847 million bbls so far this month, although it did scramble back above 1 billion bbls in the past two trading sessions. Looking ahead, trading volumes could be on track for a sustained revival amid a host of price catalysts. They include lingering growth concerns, Russian production losses, dwindling spare capacity, persistent inflationary pressures, and Fed policy tightening. And then there is the Iranian wildcard which could surprise at any moment. In short, the coming months may be anything but quiet.