US oil inventories are still at multi-year lows for this time of year, despite record releases from the Strategic Petroleum Reserve (SPR), reports of weakening gasoline demand over the past weeks due to high prices and the slowing economy. Commercial inventories of crude and products have failed to rebuild in recent months, and the low levels point to continued tight markets for gasoline and diesel in the near term, which may support oil prices.
However, the slump in US gasoline demand has been highlighted in recent weeks after the national average price hit a record $5 a gallon in mid-June. This, combined with fears of a recession, have weighed on WTI crude oil prices. The US benchmark has this week achieved the widest discount in more than three years compared to the international benchmark Brent crude.
This weakened demand for gasoline has weighed on WTI, while Brent prices reflect tight global physical supplies, driven by Russia’s war on Ukraine and Western sanctions, as well as the European Union’s ban on Russian oil that will be implemented before the end of this year. WTI’s biggest discount to Brent in three years is fueling a surge in U.S. crude exports, which hit a record high of 4.5 million barrels per day (bpd) in the reporting week to July 22
The latest data, however, shows that the destruction of gasoline demand is not as clear-cut as it initially appeared, with four-week average gasoline demand still trending upward, according to EIA data.
Despite signs of downward pressure on WTI crude prices, the lowest US oil inventories in years (for some products in decades) are a strong bullish factor for oil prices, although it is not a fact that can overcome fears of a market recession.
In the last reporting week through July 22, crude oil commercial inventories fell by 4.5 million barrels, EIA data showed. At 422.1 million barrels, US crude inventories are about 6% below the average for this time of year. In 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, have been the tightest market this year, with current inventory levels 23% below the five-year seasonal average.
Distillate fuel inventories, which are more closely linked to the business cycle, are the lowest for the time of year since 2000, according to data compiled by Reuters market analyst John Kemp . Through the third quarter, distillate stocks have risen by less than 1 million barrels, an unusually low pace of inventory building. This is one of the smallest distillate inventory builds in the past four decades, Kemp notes.
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An economic slowdown could help rebalance these very low levels of distillate stocks, but rebalancing could take a deeper and longer downturn in activity, Kemp argues.
In fact, the US economy is slowing down. The US Commerce Department’s advance estimate on Thursday showed GDP contracted 0.9% in the second quarter, after a 1.6% drop in the first quarter. In theory, the GDP data met a common 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 remain strong, particularly the labor market, and the external conditions that keep inflation higher are unique.
“When you create almost 400,000 jobs a month, that’s not a recession,” U.S. Treasury Secretary Janet Yellen told NBC’s Meet the Press last weekend, days before the data was released. GDP data.
Policymakers admit there is a slowdown, but the US economy shows no general signs of recession.
“I don’t think the United States is currently in a recession. 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 later this week for the Fed to announce another 75. -Increase of basic points in key interest rates.
“Growth was really extraordinarily high last year, 5.5 percent. We would have expected growth to slow down. There’s also more of a slowdown now,” Powell said, reiterating the Fed’s target of a “soft landing”.
“If you think about what a recession really is, it’s a widespread decline in many industries that lasts for more than a couple of months and there’s a lot of specific evidence. And this doesn’t look like that,” added the president of the Fed.
By Tsvetana Paraskova for Oilprice.com
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