The oil market wrapped up another volatile week of hectic trading, swinging up and down in a $5 a barrel range as it was pulled between bullish and bearish catalysts in both directions every day. Both benchmarks hit an eight-week high early on Tuesday, only to pull back later in the day and join on Wednesday the sell-off on Wall Street triggered by renewed investor concerns about a possible recession as top retailers flagged soaring costs and supply chain bottlenecks in their quarterly earnings reports.
In the week to May 20, oil market participants paid more attention to “recession fear” headlines than to the weekly U.S. petroleum status report, which showed another draw in gasoline inventories and higher implied domestic demand, which—despite record-high gasoline prices in America—is only set to rise further as we enter the summer driving season.
“The market is reacting to all sorts of different headlines hour to hour, and the movement in oil markets on a day-by-day basis getting even more exaggerated,” Andrew Lipow, president of Lipow Oil Associates in Houston, told Reuters on Thursday, when oil settled higher after the U.S. dollar weakened, following a plunge in crude prices in earlier trading on the same day.
Overall, the market appeared more concerned about the rising odds of a recession rather than falling U.S. fuel inventories to multi-year low levels for this time of the year. Investors and speculators pulled back from oil, with crude being a riskier asset, as concerns about a more pronounced global economic slowdown—and even a recession—intensified and dampened risk appetite.
“The possible easing of U.S. sanctions against Venezuela could be considered another bearish factor, coming in addition to the Hungarian veto on the EU’s plan to ban Russian oil,” Sebastien Bischeri, Oil & Gas Trading Strategist at Sunshine Profits, wrote in Investing.com.
The EU is still struggling to persuade Hungary to accept an EU embargo on Russian oil imports. Adding to bearish factors were fresh COVID outbreaks in China, where Shanghai is tentatively reopening, but infections are rising in the Beijing area.
However, while the market is focused on gloomier economic outlooks, it has ignored—at least this past week—the critically low U.S. fuel inventories.
Not that oil demand has soared so much. It’s the capacity for supply, globally and in the U.S, that is now a few million barrels per day lower than it was before the pandemic. Rising demand since economies reopened and people returned to travel, combined with lower refining capacity and very tight distillate markets have drawn down U.S. product inventories to below seasonal averages and at multi-year lows, with record-low inventories reported on the East Coast.
Total motor gasoline inventories decreased by 4.8 million barrels in the week ending May 13, and are about 8% below the five-year average for this time of year, the EIA said in its latest weekly inventory report on May 18. Implied gasoline demand, measured as products supplied, rose, despite record-high prices across the United States.
Gasoline inventories in the U.S. are at their lowest levels for this time of the year since 2014, with stocks on the East Coast even tighter, at their lowest since 2011 for this time of the year.
Related: EU Faces Same Hurdles Over Tariff On Russian Oil As With Embargo
“While refiners have some room to increase runs (utilization rates increased by 1.8 percentage points to 91.8% over the week), gasoline demand should increase as we move into driving season, which suggests that we will see further tightness in the US gasoline market. In this case, we are likely to see further pressure on the US administration to try rein in gasoline prices,” ING strategists Warren Patterson and Wenyu Yao wrote on Thursday.
According to Bjarne Schieldrop, Chief analyst, Commodities, at SEB:
“The global refining system is severely stretched following reductions in capacities in 2020/21, reviving oil product demand along with re-openings with Russia/Ukraine issues on top. We are now heading into summer driving season with much higher gasoline demand with a start-out of very low inventories.”
Concerns about economic growth, and consequently, demand for fuels, are yet to be reflected in actual data, Saxo Bank said on Thursday.
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“On the ground, however, this worry has yet to be reflected with inventories of crude oil and gasoline still falling while US implied gasoline demand, despite record prices, remains robust.”
“Meanwhile, in China the easing of lockdowns is not going well with fresh outbreaks slowing the pace towards normalisation. Until then, the market is likely to focus on the general level of risk appetite, which is currently challenged,” Saxo Bank’s strategy team noted.
By Tsvetana Paraskova for Oilprice.com
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Tight fuel inventories are the result of rising demand and shrinking global production capacity whilst recession is the result of rising energy prices pushing inflation rates higher. They both share common underlying factors.
In normal circumstances, a recession is often accompanied by a decline in both oil and energy demand and prices.
But we are in abnormal circumstances where we have a tight market and a robust global energy demand with a shrinking global spare production capacity. In such a situation, even a recession could hardly affect oil and energy demand. It would rather decelerate demand growth without causing prices to drop.
It is a great irony that Russia’s economy would probably emerge from the Ukraine conflict in far better shape than the economies of the Western nations imposing the sanctions.
High oil and energy prices are here to stay well into the future.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London