Demand Destruction Could Help America Refill Its Oil Inventories

Oil Inventories

U.S. oil inventories are still at multi-year lows for this time of year despite record releases from the Strategic Petroleum Reserve (SPR), with reports of weaker demand for oil. gasoline over the past few 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 indicate that gasoline and diesel markets remain tight in the near term, which could support oil prices. oil.

Still, the focus has been on a drop in U.S. gasoline demand in recent weeks after the national average price hit a record high of $5 a gallon in mid-June. This, combined with fears of a recession, weighed on WTI crude prices. US benchmark hits this week his biggest discount in more than three years compared to the international benchmark of Brent Crude.

This decline in gasoline demand weighed on WTI, while Brent prices reflect tight global physical supplies, supported by Russia’s war on Ukraine and Western sanctions, as well as the ban on European Union on Russian oil which should be implemented before the end of this year. WTI’s biggest discount to Brent in three years leads to a sharp increase in US crude oil exports, which hit a record high of 4.5 million barrels per day (bpd) in the reporting week ending July 22.

The most recent data, however, shows that the destruction of gasoline demand is not as clear-cut as it initially appeared, with the four-week average gasoline demand still trending higher, according to EIA data.

Despite signs of downward pressure on WTI crude prices, the lowest U.S. oil inventories in years – for some commodities in decades – are a significant bullish factor for oil prices, even if there is no It’s unclear whether it can outweigh fears of a market recession.

During the last reporting week to July 22, commercial crude oil inventories decreased by 4.5 million barrels, EIA data showed. At 422.1 million barrels, crude oil inventories in the United States are about 6% below average for this time of year. In gasoline, inventories fell by 3.3 million barrels last week and are around 4% below the five-year average for this time of year. Distillates, which includes diesel, has been the tightest market this year, with current inventory levels 23% below the five-year seasonal average.

Distillate fuel oil inventories, which are most closely tied to the business cycle, are at their lowest for the time of year since 2000, according to data compiled by Reuters market analyst John Kemp. So far in the third quarter, distillate inventories have risen by less than a million barrels, an unusually low pace of inventory build. This is one of the smallest distillate inventories in the past four decades, Kemp notes.

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An economic slowdown could help rebalance these very low levels of distillate inventories, but the rebalancing could require a deeper and longer downturn in activity, Kemp argues.

Indeed, the US economy is slowing down. The U.S. Commerce Department’s advance estimate showed on Thursday that GDP contracted by 0.9% in the second quarter, after a 1.6% drop in the first quarter. In theory, the GDP data corresponded to a common definition of a recession: two consecutive quarters of GDP contraction.

But policymakers insist that the “technical” recession is not a general recession because many sectors of the economy are still strong, especially the labor market, and external conditions that are pushing inflation to the rise are unique.

“When you’re creating almost 400,000 jobs a month, that’s not a recession,” US Treasury Secretary Janet Yellen said on NBC. Meet the press last weekend, a few days before the release of the GDP data.

Policymakers admit there is a slowdown, but the US economy is not showing widespread signs of recession.

“I don’t think the United States is currently in a recession. And the reason for that is that there are just too many sectors of the economy that are doing too well,” Fed Chairman Jerome Powell said. . said at a news conference this week after the Fed announced another 75 basis point hike in key rates.

“Really, growth was extraordinarily high last year, 5.5%. We would have expected growth to slow down. There’s also more slowdown right now,” Powell said, reiterating the goal. of a “soft landing” from the Fed.

“If you think about what a recession actually is, it’s a broad-based decline across many sectors that’s sustained for more than two months and there’s a bunch of specific tests. And it just doesn’t seem like that. , “added the Fed Chairman.

By Tsvetana Paraskova for Oilprice.com

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