Oil erased almost all gains from a surprise OPEC+ production cut as signs of a global economic slowdown compounded a bearish technical correction.
Global gasoline markets are slowing at a time when they should be rising or even peaking, while demand for diesel, an important indicator of industrial activity, is lagging both in the U.S. as in Asia. Meanwhile, a US economic report indicated that the economy has stagnated in recent weeks, casting a cloud over risk assets and the outlook for energy demand.
Accelerating the price decline, traders say, is a technical correction known as gap filling. A sudden surge in prices, like the one after OPEC and its allies announced an unexpected production cut, creates a gap in charts where numbers have moved sharply with little trading in between. This gap often causes a corrective move to fill the large price breakout.
“Big technical chart gaps like the ones we’re seeing in futures keep most traders very nervous,” said Dennis Kissler, senior vice president of trading at BOK Financial Securities. “After a gap like this, more times than not, the market will migrate to the downside.”
Despite this week’s pullback, crude oil is still climbing from a 15-month low hit in mid-March after banking sector turmoil. A surprise OPEC+ announcement on production cuts and reduced Iraqi flows underpin much of the gains, and expectations of a pick-up in Chinese demand are also supportive.
Separately, a US official said the US could start replenishing its Strategic Petroleum Reserve as early as autumn. The timetable will depend on infrastructure maintenance and how the administration can manage a sale of 26 million barrels at the end of June.
Prices:
- WTI for May delivery, which expires on Thursday, fell $1.87 to settle at $77.29 a barrel in New York.
- The most active June contract fell $1.87 to settle at $77.37 a barrel.
- Brent for June settlement lost $2.02 to $81.10 a barrel.
