Oil wiped out almost all of the gains stemming from OPEC+’s surprise output cut as signs of global economic slowdown compound a bearish technical correction.

Global gasoline markets are slowing at a time when they should be ramping up or even peaking, while diesel demand, an important indicator of industrial activity, is lagging in both the U.S. and Asia. Meanwhile, a U.S. economic report signaled the economy has stalled in recent weeks, casting a cloud over risk assets and energy demand prospects.

Accelerating the price drop, traders say, is a technical correction known as gap fill. A sudden spike in prices — such as the one that occurred after OPEC and its allies announced an unexpected production cut — creates a breach in charts where numbers have moved sharply with little trading in between. This gap often prompts a corrective move to fill the large break in prices. 

“Large technical chart gaps like we’re seeing in the futures keep most traders very nervous,” said Dennis Kissler, senior vice president of trading at BOK Financial Securities. “After a gap like that occurs, more times than not, the market will migrate downwards.” 

Despite this week’s pullback, crude is still up from a 15-month low reached in mid-March following turmoil in the banking sector. A surprise announcement by OPEC+ on production cuts and curbed Iraqi flows underpin much of the gains, with expectations of a rebound in Chinese demand also supportive.

Separately, a U.S. official said the U.S. could start to replenish its Strategic Petroleum Reserve in the early fall. The timing will depend on infrastructure maintenance and how well the administration can manage a sale of 26 million barrels by the end of June.

Prices:

• WTI for May delivery, which expires on Thursday, fell US$1.87 to settle at US$77.29 a barrel in New York.
• The more-active June contract dropped US$1.87 to settle at US$77.37 a barrel.
• Brent for June settlement lost US$2.02 to US$81.10 a barrel.