US petroleum inventories are still at multi-year lows for this time of year despite record releases from the Strategic Petroleum Reserve (SPR), reports of weaker gasoline demand in recent weeks due to high prices and a slowing economy. Commercial crude and product inventories have failed to rebuild in recent months and the low levels point to continued tight markets for gasoline and diesel in the near term, potentially supporting oil prices.
Still, a fall in US gasoline demand has been highlighted in recent weeks after the national median price hit a record $5 a gallon in mid-June. This, coupled with recession fears, has weighed on WTI crude oil prices. The US benchmark posted its biggest discount in over three years this week versus the international Brent crude benchmark.
That flagging demand for gasoline has weighed on WTI, while Brent prices reflect tight global physical supplies fueled by Russia’s war on Ukraine and Western sanctions, as well as the European Union’s ban on Russian oil coming into effect before the end of this year should, get boost. WTI’s biggest discount to Brent in three years is boosting US crude oil exports, which hit a record high of 4.5 million barrels per day (bpd) in the reporting week ended July 22.
However, the latest data shows that the destruction of gasoline demand is not as clear-cut as it first appeared, as average four-week gasoline demand is still trending higher, according to EIA data.
Despite signs of downward pressure on the price of WTI crude, the lowest U.S. oil stockpiles in years – decades for some products – are a strong bullish factor for oil prices, although it’s not a given that this could outweigh the market’s fears of a recession.
In the last reporting week ended July 22, commercial crude stocks fell by 4.5 million barrels, EIA data showed. US crude inventories are 422.1 million barrels, about 6% below this time of year average. Gasoline inventories fell 3.3 million barrels last week and are about 4% below the five-year average for this time of year. Distillates, which includes diesel, has been the tightest market this year, with current inventories 23% below the five-year seasonal average.
Distilled heating oil inventories, which are most closely related to the economic cycle, are at their lowest since 2000, according to data for the season compiled by Portal market analyst John Kemp. So far in the third quarter, distillate inventories have risen by less than 1 million barrels, an unusually low rate of inventory build-up. 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 those very low distillate inventories, but the rebalancing could require a deeper and longer decline in activity, Kemp argues.
In fact, the US economy is slowing down. The US Commerce Department’s preliminary estimate on Thursday showed that GDP contracted 0.9% in the second quarter, after contracting 1.6% in the first quarter. In theory, the GDP data met a common definition of a recession – two consecutive quarters of GDP contraction.
However, policymakers insist that the “technical” recession is not a broad-based recession as many areas of the economy are still strong, notably the labor market, and external conditions driving inflation are unique.
“If you add nearly 400,000 jobs a month, that’s not a recession,” US Treasury Secretary Janet Yellen told NBC’s Meet the Press last weekend, days before the GDP data was released.
Policymakers are conceding a slowdown, but the US economy is showing no broad-based signs of a recession.
“I don’t think the US is in a recession right now. And that’s because there are just too many areas of the economy that are doing too well,” Fed Chair Jerome Powell said at a news conference this week after the Fed announced another 75-basis-point hike in interest rates.
“Really, the growth was extraordinarily high last year, 5.5 percent. We would have expected growth to slow down. There’s also another 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 lasts more than a few months and there’s a specific set of tests in it. And that just doesn’t seem to be the case,” the Fed chairman added.
By Tsvetana Paraskova for Oilprice.com
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