OIL FUTURES: Crude lacks direction as market eyes budding demand woes, tight global supply

Crude futures settled mixed May 24 as the market weighed demand concerns fueled by weak US economic data and an uptick in Chinese COVID-19 cases against tight global supply outlooks.

NYMEX July WTI settled down 52 cents at $109.77/b while ICE July Brent climbed 14 cents to $113.56/b.

Oil prices saw headwinds early in US trading after selling pressure resumed in equity markets on the heels of weaker than expected US economic data.

The S&P Global Commodity Insights flash services PMI for May fell to 53.5 compared with 55.6 in April, while the flash manufacturing sector PMI dropped 1.7 points to 57.5 in May, a three-month low.

"The flash PMI readings showed a sharper deceleration in economic activity as inflationary pressures linger," OANDA senior market analyst Ed Moya said in a May 24 note. "Oil prices remain directionless as energy traders try to assess how significant the deceleration in economic activity will be for the short-term crude demand outlook."

A late session rally pushed NYMEX June RBOB futures to settle 1.33 cents higher at $3.8110/gal and June ULSD climbed 1.30 cents to $3.7818/gal.

The weak US data further stressed demand outlooks already under pressure due to lingering Chinese pandemic lockdowns. China reported 802 new COVID-19 infections on May 23 with about 550 of these in Shanghai, where authorities have begun gradually easing restrictions. In Beijing, cases doubled to 99, from a previous daily average of around 50. Authorities in the capital have extended a work from home order to two more districts, Shijingshan and Haidian, bringing the total to six.

UBS Group and JPMorgan Chase have cut their China economic growth forecasts on concerns over the economic fallout from the country's pursuit of a zero-COVID strategy. The former cut its 2022 GDP growth forecast to 2% from 4.2%, while the latter reduced its forecast to 3.7% from 4.3%. In April, Chinese authorities announced targeted full-year growth of around 5.5%.

"The prevailing macro angst and disappointment surrounding China's stimulus announcements continues to keep a cap on oil upside, but a strong fundamental backdrop has seen energy markets remain well insulated from material downside," TD Securities analysts said in a note.

Underinvestment in key oil and gas projects is concerning as the industry might struggle to guarantee energy supplies, Saudi Aramco Chief Executive Amin Nasser said at the World Economic Forum in Davos May 24. Nasser warned of further imbalances if companies continue to be afraid of making investments under pressure from green energy, as the world is running with less than 2% of spare oil capacity.

Meanwhile, EU member states appear to be moving closer to an embargo on Russian imports of crude oil to the bloc, according to Germany's Economy Minister Robert Habeck.

"We will reach a breakthrough within days," he said, adding that "it is obviously an unusual measure, but these are unusual times."

If approved, the embargo would halt EU crude imports of some 2.3 million b/d within six months, according to S&P Global, excluding a possible extension for 200,000 b/d to Hungary and Slovakia whose opposition has so far prevented unanimous vote needed for approval.