Fuel Futures Rise Amidst Decrease in Crude Oil Inventories
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Following a notable 1.4M-barrel drop in domestic crude inventories, crude oil futures rebounded from early losses to settle higher on Wednesday, bolstered by an increase in refinery utilization. This decline came in stark contrast to the substantial 7.3M-barrel build the preceding week, although a less encouraging 1.9M-barrel increase was observed at the Cushing, Oklahoma delivery hub.
Global Factors and Analyst Insights
Market analysts noted that heightened refining operations and export activities spurred a minor draw in crude inventories. Kpler analyst Matt Smith highlighted that stronger refining and export practices helped offset the previous week’s substantial build, as reported by Reuters. Furthermore, geopolitical risks play a pivotal role in shaping market dynamics, with Mizuho analyst Robert Yawger emphasizing the potential for a downside in the geopolitical risk premium should there be progress in Israeli-Hamas ceasefire negotiations.
Front-month Nymex crude (CL1:COM) for June delivery showed resilience, closing at +0.8% to $78.99/bbl, marking its best settlement in a week. Concurrently, front-month July Brent crude (CO1:COM) finished at +0.5% to $83.58/bbl, highlighting the overall market sentiment amidst fluctuating demand and supply dynamics.
Diminished U.S. Fuel Demand and Refining Margins
Recent data from the Energy Information Administration revealed a concerning trend in U.S. gasoline and diesel demand, plummeting to their lowest seasonal levels since the onset of the pandemic. The four-week average demand for gasoline dropped to 8.63M bbl/day in the week concluding May 3, marking the weakest reading for the early part of May since 2020. Similarly, the four-week average demand for distillate fuels, encompassing diesel and heating oil, fell to 3.6M bbl/day, also reflecting the lowest seasonal levels witnessed since the pandemic’s outbreak.
Experts expressed apprehension regarding the economic implications of this decline, particularly in relation to overall economic performance. Notably, the drop in fuel demand has directly impacted refining margins, with the U.S. 3-2-1 spread trading below $26.50/bbl on Wednesday for the first time since February, exacerbating concerns within the industry.
Furthermore, gasoline stocks surged by 915K barrels to 228M barrels, while distillate fuel oil stocks climbed by 560K barrels to 116.4M barrels in the latest week, reaching the highest seasonal levels in three years for both metrics, highlighting the challenging landscape faced by the fuel industry.