U.S. oil inventories are still at multi-year lows for this time of year despite record numbers from the Strategic Petroleum Reserve (SPR), reports of weaker gasoline demand in recent weeks due to high prices and a slowing economy. Commercial inventories of crude oil and products have failed to recover over the past few months, and the low levels point to continued tight gasoline and diesel markets in the near term, potentially supporting oil prices.
Still, the focus has been on the decline in U.S. gasoline demand in recent weeks after the national average price hit a record $5 a gallon in mid-June. This, combined with recession fears, weighed on WTI crude prices. This week, the US benchmark saw its biggest decline in more than three years compared to international benchmark Brent Crude.
That fluctuating demand for gasoline weighed on WTI, while Brent prices reflected tight global physical supplies, bolstered by Russia’s war on Ukraine and Western sanctions, as well as the European Union’s ban on Russian oil, which is due to be implemented before the end of this year. WTI’s biggest discount to Brent in three years led to a surge in US crude exports, which hit a record 4.5 million barrels per day (bpd) in the reporting week to July 22.
However, the latest data shows that the destruction of gasoline demand is not as clear-cut as it initially appeared, with the four-week average for gasoline demand still trending upward, according to EIA data.
Despite signs of downward price pressure on WTI Crude, the lowest US oil inventories in years – for some products in decades – are a strong bullish factor in oil prices, although it is not certain that it can overcome market fears from recession.
In the most recent reporting week to July 22, commercial crude oil inventories fell by 4.5 million barrels, EIA data showed. At 422.1 million barrels, U.S. crude oil inventories were about 6% below the average for this time of year. Gasoline inventories fell by 3.3 million barrels last week and are about 4% below the five-year average for this time of year. Distillates, which include diesel fuel, are the tightest market this year, with current inventory levels 23% below their five-year seasonal average.
Stockpiles of distillate fuel, which are most closely linked to the economic cycle, were at their lowest level since 2000, according to data compiled by Reuters market analyst John Kemp. So far in the third quarter, distillate stockpiles have increased by less than 1 million barrels, an unusually low rate of stockpiling. This is one of the smallest distillate inventories in four decades, Kemp noted.
Related: The biggest drivers in global steel supply
An economic slowdown may help rebalance these very low levels of distillate stocks, but rebalancing may require a deeper and longer downturn in activity, Kemp argued.
Indeed, the US economy is slowing down. The US Commerce Department’s preliminary estimate showed on Thursday that GDP shrank 0.9% in the second quarter, following a 1.6% drop in Q1. In theory, GDP data fits one commonly accepted definition of a recession – two consecutive quarters of GDP contraction.
But policymakers insist the “technical” recession is not a broad-based recession because many areas of the economy are still strong, particularly the labor market, and the external conditions pushing inflation higher are unique.
“When you’re creating almost 400,000 jobs a month, it’s not a recession,” U.S. Treasury Secretary Janet Yellen said on NBC’s Meet the Press last weekend, a few days before the GDP data was released.
Policymakers acknowledge there is a slowdown, but the U.S. economy shows no widespread signs of recession.
“I don’t think the US is in a recession right now. And the reason is that there are too many areas of the economy that are doing too well,” Fed Chairman Jerome Powell said at a press conference this week after the Fed announced another 75-fold hike in key interest rates.
“Really, growth was extremely high last year, 5 and a half percent. We expected growth to slow. There’s also more of a slowdown now,” Powell said, reiterating the Fed’s goal of a “soft landing.”
“If you think about what a recession really is, it’s a broad-based decline in many industries that goes on for more than a few months and has a bunch of specific tests in it.” And it just doesn’t look like it,” the Fed chairman added.
By Tsvetana Paraskova for Oilprice.com
More top reads from Oilprice.com:
Add Comment