Should our market hold up reasonably well today, we will be brazenly but nervously calling for a bottom – at least for the immediate future. It might well turn out that what we saw on Monday and yesterday morning, in the immediate aftermath of the OPEC+ decision to roll some of the supply constraints over to 2025 and taper the rest between October 2024 and September 2025 was a defensive action against the unexpected element of the ministerial meeting. Nerves have probably calmed and maybe confidence is growing that a.) consumption will increase by a healthy pace during the summer and consequently b.) global oil stocks will deplete at least throughout the third quarter. One might argue that there is simply no fundamental justification for higher prices and the counterargument would be that the same goes for the sharp sell-off. True enough, the picture is blurred. Although WTI shed almost $1/bbl during yesterday’s roller-coaster ride, their structures strengthened reassuringly. Better yet, the RBOB contract managed to finish the day in the black.

Markets tend to overreact – it is the inevitable impact of financialization. Whether the $8/bbl drop in the last 5 trading sessions is such an overreaction to perceived entrenched inflationary pressure and an oversupplied market remains to be seen. Yesterday’s US job data hints at a softer labour market and a September rate cut from the Fed. Our take that the recovery has started would be confirmed by a stubborn performance today. This morning’s reaction to yesterday’s almost shockingly bearish API report (builds all around) is heartening. The afternoon’s EIA data, nonetheless, might depress the mood; or brighten it further if it disagrees with the API. Next week’s updated estimates from the three pivotal agencies on global oil balance will also shape investors’ perspective. The current snapshot and the sturdiness observed this morning imply that Sunday’s outcome was not as bad as the steep price fall indicates. But again, what is certain in life are death, taxes and the unpredictability surrounding the oil market.

US Households Still Hold the Key to Oil Demand

It will be interesting to see if a few recent developments within the data sets of the United States outline a picture of changing fortunes for the world’s leading economy. In an accelerated pace, the May Institute for Supply Management (ISM) manufacturing PMI came in on Monday at 48.7, down from the 49.2 measure in April. The reading was very much lower than the expected 49.6 and the report was presented by the ISM Chair, Timothy Fiore, as one of contraction. The Chair observed, “US manufacturing activity continued in contraction after growing in March”, and listed the drivers behind what appears to be the start of a slowdown; starting with new orders that saw customers inventories at ‘just right’ levels and a reduction in the backlog of fresh business, which indicates a demand scenario that is softening. His report then went on to outline how current monetary and overall conditions are making companies risk averse to order commitments, inventory building and capital expenditure.

This comes after the April reading of Retail Sales had undershot forecasting. In the categories that make up the marker, sales fell in most of them. Importantly, there was a 0.8% decline in the sales of motor vehicles and accessories. Sales outside of cars, gasoline stations and food services fell and according to Haver Analytics, non-store retail sales fell 1.2% in April, the third month-on-month fall in four months, after a 2.5% rebound in March. Sporting goods, hobby shopping, book & music store sales decreased 0.9% following a 1.3% March drop and a 0.7% February rise. There was also a reduction in sales within furniture and furnishings for the fourth straight month with general/miscellaneous sales showing three months of consecutive declines.

As recently pointed out across Bloomberg and the FT, the slip in sales is represented in changes of behaviour borne out by a breakdown of the recent PCE data. Disposable income is slipping along with the number of monies that are finding their way into savings accounts. The Bureau of Economic Analysis noted an increase in service spending such as health, housing and utilities but regarded the fall in air and general transportation as a notable offset. In its Personal Income and Outlays, ‘goods’ as a category saw large decreases in recreational goods and vehicles. Behaviour is neatly exampled in how Real Disposable Income decreased by 0.1% in April against how consumer spending fell by the same percentage leading to a reduction in spending on goods by 0.4%. A change in attitude has been observed by companies such as Best Buy, noticing an adjustment in recent months as shoppers switch to cheaper brands.

Rather than be thankful to the US in having been the shining light of economies over the recent years, many media headlines are very much enjoying that notion that US ‘exceptionalism’ is over. The higher interest rate environment has not quelled overall inflation but has served to dispirit the US consumer and by doing so cause a headache for demand which cannot be spun, for bad news is indeed bad news. Although finished motor gasoline 4-week average demand is holding steady at or around 9mbpd, according to the EIA, there is no exceptional gasoline season as of yet. At-the-pump gasoline prices are consistently falling and have done for the last two months. According to GasBuddy, at the beginning of April American motorists were paying $3.69/gallon, whereas today they are paying $3.50/gallon. This comes in conjunction with diesel prices being their lowest since 1998 and overall distillate demand falling sharply. The EIA uses products supplied as its marker for demand in distillate which has also been falling and marries up with lower industrial use partly represented by the above ISM data. Whether or not the powerful US consumer step back will continue only time will tell, but oil prices bereft of buoyant, spending Americans have few other areas to rely on for consistent demand. One wonders if this data set will be enough for the Fed to spring into action as the last thing the world or oil prices need is an American economy that flirts with recession.

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