Oil makes the world go round

WTI crude prices are down sharply today, reflecting persistent weakness across the global economy. Despite the usual volatility surrounding the March contract roll, oil spreads remain exceptionally narrow, signaling a lack of momentum in the market and ongoing expectations for oversupply. This continuation of subdued activity shows a broader trend: energy demand is lagging behind expectations, and the anticipated seasonal uptick in gasoline prices, typically a marker for higher demand in the US, is nowhere to be found.

RBOB gasoline, in particular, is still failing to reach its winter rise. The market seems to be grappling with two key issues. First, the short-term spike in the overall economy seen at the close of last year, which failed to materialize in actual demand, is now catching up with expectations. Second, more concerning is the fact that the energy markets are now confirming the weaker-than-usual demand highlighted in the recent PMIs.

The energy complex has long been blamed for its dependency on China, and there’s some truth to that. After all, China’s industrial and manufacturing sectors are a critical driver of global energy consumption, particularly for oil. Yet, another side of the issue today lies closer to home. The stagnation in gasoline demand, as reflected in both the retail and refinery data, is increasingly tied to weak US domestic consumption.

In other words, from RBOB alone, the market had said there was no lasting shift in the economic climate. If anything, the outlook priced into gasoline as oil was consistent the entire time: once the artificial stuff faded, it would be right back into same mess as before.

Now the data more broadly is catching up to those prices as well as expectations now fading quickly, re-establishing a much weaker economic backdrop. As consumer sentiment weakens, reflected in the downturn in retail and hiring activity, the outlook for energy demand keeps spreads depressed anticipating that same path into oversupply.

As such, the weakness in oil and gasoline prices reflects a broader slowdown in consumer-driven sectors. As more data rolls in from retail, hiring, and broader PMI surveys, it’s becoming increasingly clear that the global recovery, especially in energy demand, may be stalling if it hasn’t already. Energy markets are now staring down the reality of a weaker-than-expected demand landscape, which actually means the supply-demand equation might turn out to be even less favorable than already anticipated through the first half of the year.

In summary, while global energy markets were looking to China for clues on oil demand, the real story is unfolding in the US. Gasoline, particularly, is oddly showing no signs whatsoever of the typical seasonal surge, confirming the loss of momentum. Combined with a narrow spread in oil contracts and an unclear outlook for global consumption, the energy markets are facing significant challenges in the months ahead.

Globally synchronized.