Oil Trading Aimless As Clash Between Conflicting Fears Continues

However, energy-supply imbalance may influence trading moving forward: File Image/Pixabay

With fear of demand destruction due to China's Covid lockdowns clashing with fear of scant supply as the European Union's proposed ban on Russian crude gained support from Germany, oil on Wednesday struggled to find direction - and wound up achieving minimal gains.

Brent settled up 33 cents to $105.32 per barrel, and West Texas Intermediate settled up 32 cents to $102.02 per barrel.

Germany reversing course and stating it will support a ban on Russian oil as long as it's conducted in phases caused Brian Kessens, a portfolio manager at Tortoise, to remark, "All else equal, we are going to see a significant oil rally to the extent that it is a true oil embargo."

While that outcome remains unclear, it was reported on Wednesday that European refiners continue to load up on North Sea crude as a replacement for Russian stocks: all Forties cargoes loaded so far in April were sold to Europe, and all but two tankers with Johan Sverdrup were sent to the region, according to ship tracking data (the majority of those grades went to Asia prior to Russia's invasion of Ukraine).

Another case for a bullish outlook was provided by the latest consumption data from the U.S. Energy Information Administration: while stockpiles rose 619,000 barrels last week, refined products continued to show tightness: gasoline stocks in New England fell to their lowest since 1991, and diesel inventories sunk to their lowest since 1996.

The main source of consternation for traders – the China lockdowns – also showed signs of relief on Wednesday, with Covid case numbers in Beijing stabilizing and Shanghai suggesting that restrictions could soon be eased.

Also, the People's Bank of China announced that it would "step up the prudent monetary policy's support to the real economy, especially for industries and small businesses hit hard by the pandemic."

Phil Flynn, senior market analyst at Price Futures Group Inc., said, "More stimulus from China could mean more oil demand and that is a sign of hope in a market that has been concerned about slowing demand not only in China but around the world."

If anything, the energy-supply imbalance – not demand fears – will likely be the main issue moving forward, even if the trading behaviour of traders is erratic: Yeap Jun Rong, market strategist at IG, stated in a note on Wednesday, "With Russia's move to cut off gas flows to Poland and Bulgaria in its threat for fuel payment in rubles, it puts other European countries in the crosshairs as well, and the potential scenario of a worsening energy supply-demand imbalance brings back the narrative of persistent inflation."