John Kemp, Reuters

The rally that carried oil prices up by more than $20 per barrel between the middle of January and the end of April seems to have run out of steam for the time being.

Spot crude prices, time spreads and refining margins have all showed signs of weakening since the start of this month. Crude prices are struggling to rise further despite signs of continued growth in consumption.

Prices for both WTI and Brent futures with delivery dates in July peaked at the end of April and have been gradually falling.

Prices for both futures contracts May 9 closed below their 14-day and 20-day moving averages for the first time since early April illustrating how the rally has run out of momentum.

Time spreads, which tend to track the supply-demand balance, have eased since the end of April after tightening progressively since the start of the year.

Short-term interruptions to crude output, including wildfires in Alberta and problems with Libya’s exports, have failed to provide a sustained boost to either spot prices or time spreads.

Refining margins have also started to soften which could be a bad sign for oil demand if they encourage refiners to cut crude processing.

In the U.S., the generic 3-2-1 crack spread, which measures the gross revenue from turning three barrels of crude into two barrels of gasoline and one barrel of diesel, has fallen from $19 to around $15.50.

Valero, the largest independent refiner in the U.S., reports indicative margins for its refineries along the Gulf Coast have dropped from $20 to less than $17.

After firming progressively since February, indicative margins for refineries in the mid-continent area slipped last week from almost $13 to less than $11.

In the last couple of weeks, U.S. refinery throughput has slipped below the record rates reported at the same time a year ago.

Hedge funds seem to sense the rally may be running out of momentum, and have closed some bullish long positions, taking profits.

Hedge funds and other money managers reduced their record net long position in WTI and Brent futures and options from 663 million barrels (MMbbl) on April 26 to 620 MMbbl on May 3.

Long positions were cut by almost 38 MMbbl while short positions were increased by more than 5 MMbbl.

Profit taking was especially pronounced in Brent, where hedge funds and other money managers cut their long positions by 28 MMbbl, or around 6 percent.

Across the three major WTI and Brent contracts, hedge funds cut their net long position by 43 MMbbl, the largest one-week decline since November 2015.

The concentration of hedge fund positions on the long side of the market has increased the risk of a price reversal as a result of long liquidation.

The oil market is heading into the strongest period of demand in the year as the U.S. driving season begins at the end of the month which should provide some support to prices.

But at the moment attention has shifted away from the decline in crude production and growth in demand to the overhang of refined products such as gasoline and diesel, causing the rally to stall.