WTI came under heavy selling pressure this week, finishing at $9.61 lower to settle at $89.01 on Friday. This was the biggest weekly decline since early April as evidence of a global economic slowdown curbing demand grows. Oil at $89 is now at its lowest level in six months.
Contributing to the fall in price was a bearish inventory report from the EIA as crude stockpiles increased by more than 4 MMBbl. Meanwhile, the four-week average of U.S. gasoline consumption, the best indication of the country's demand, is currently more than 1 MMBbl/d below pre-Covid seasonal averages. The drop indicates that the glimmer of demand recovery witnessed last week was only temporary or noisy data. Despite pump prices falling for seven straight weeks, they haven't been sufficient to get drivers back on the road due to inflation still constraining consumer spending.
On Wednesday, OPEC and its allies, including Russia, decided to modestly increase production in September by 100 MBbl/d. The bloc’s delegates expressed concern that a possible US recession and Covid-19 lockdowns in China will dampen consumption. Additionally, the group warned about "severely limited" spare capacity. It is believed that UAE and Saudi Arabia are the only two oil producers believed to have material spare oil production capacity. Analysts estimate this spare capacity to be between 1-2.5 MMBbl/d, low by historical standards.
Crude's rally, which had been on the rise for the first five months of the year, has been thrown into reverse, with losses extending this month after declines in June and July. The selloff, which has erased gains brought on by Russia's invasion of Ukraine, will likely lessen the inflationary pressures coursing through the global economy.
AEGIS hedging recommendations remain costless collars. A collar would allow a price floor to be set to protect against deteriorating prices and allow for upside participation if prices realize higher than the current strip.