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Amid broad market sentiment rebound, WTI crude oil bounced back above $77.55 per barrel, up 1.11%. Crude Oil markets are recovering despite ongoing concerns over US oversupply. Fed rate cut bets continue to get hammered by sticky inflation fears. US Crude Oil rebounded on Friday, recovering from a fresh 12-week low set early in the day at $76.03. WTI remains down on the week, in the red by -2.38% from Monday’s opening bids. Brent is +0.99% up on the day, trading at $81.87 at the time of writing.
A recovery in broad market risk appetite is bolstering Crude Oil markets after investor hopes for a rate cut from the Federal Reserve (Fed) in September were knocked further back this week. According to the CME’s FedWatch Tool, rate traders are pricing in slightly-worse-than-even odds of at least a quarter-point rate trim from the Federal Open Market Committee (FOMC) in September, steeply down from 70% odds priced in at the outset of the trading week.
Data Front
US Durable Goods Orders firmly recovered in April, rising 0.7% MoM compared to the forecast -0.8% decline, while March’s figure was revised down to 0.8% from the initial print of 2.6%. University of Michigan 5-year Consumer Inflation Expectations also eased slightly to 3.0% for the month of May, falling a tick lower from the forecast hold at 3.1%. Easing inflation expectations are helping battered investor sentiment, with commodity traders still licking their wounds after a collapse in September rate cut hopes.
Talking points from policymakers at the Fed dominated financial headlines this week as Fed officials continue to press down on rate cut hopes, pushing back with cautionary statements that the Fed still needs more evidence that inflation will eventually drop to the Fed’s target of 2% annual price growth.
US Crude Oil production continues to weigh on barrel bulls after US supply counts snubbed forecast declines, showing another buildup in US Crude Oil supply lines. Energy traders were hoping for an extended decline in US supply stocks, but a surprise buildup in barrel counts from both the American Petroleum Institute (API) and the Energy Information Administration (EIA) have left Crude Oil speculators hoping for an as-yet-unseen uptick in demand to eat away at US pumping capacity.
Technical Outlook
US Crude Oil rebounded from a 12-week low to recapture the $77.50 level ahead of the week’s close. WTI continues to trade on the bearish side of the 200-hour Exponential Moving Average at $78.05, but Friday’s bullish recovery sends US Crude Oil back into familiar technical congestion.
WTI has cycled the 200-day EMA at $79.03 since dipping to a low of $68.00 in late 2023. Despite holding onto gains from 2024’s opening prices, WTI remains down nearly -11% from the year’s peaks near $87.20.
Broader Energy Markets
Mexico’s state oil company Pemex’s crude production fell below 1.5 million b/d for the first time in over 40 years, marking a new trough for the country. The Lopez Obrador government forbade new hydrocarbon bidding rounds and instructed Pemex to focus on onshore and shallow-water fields. Higher condensate production from onshore assets offset some declines in total supply figures, but not enough to halt the tide of legacy declines. US natural gas prices are set for structural upside over the next 20 years due to incremental demand from data centers and AI. The growth in US natural gas demand could amount to 30 BCf/d, pushing Henry Hub futures above $4 per mmBtu by 2035 and closer to $6 per mmBtu by 2045. Electricity demand from data centers currently adds up to 11 GW of generation.
Rig Count, Drilling Activity
Baker Hughes reported that US energy firms have cut the number of oil and natural gas rigs operating for the fourth time in five weeks, with the oil and gas rig count falling by four to 600 in the week to May 24, the lowest since January 2022. This puts the total rig count down 111, or 16%, below this time last year. Oil rigs were unchanged at 497, while gas rigs fell by four to 99, their lowest since October 2021.
In Texas, the state with almost half of the country’s operating rigs, the count fell by three to 287, the lowest since February 2022. In West Virginia, drillers cut two rigs, leaving just six active units, the lowest since August 2020. In the Marcellus shale, the rig count fell by three to 26, the lowest since October 2021.
The oil and gas rig count dropped about 20% in 2023 after rising by 33% in 2022 and 67% in 2021, due to a decline in oil and gas prices, higher labor and equipment costs from soaring inflation, and companies focusing on paying down debt and boosting shareholder returns instead of raising output. U.S. oil futures have increased by about 9% so far in 2024, while gas futures have inched up by about 2% so far in 2024.
