Surging U.S. fuel demand amid stagnant domestic crude oil production is drawing down American crude inventories at the quickest pace in nearly 40 years. The record-fast decline in U.S. oil stockpiles has started to reflect in the crude oil futures market, where the American benchmark, WTI Crude, has surged by 50 percent so far this year. The U.S. oil price has also started to narrow the discount at which it trades relative to the international benchmark, Brent Crude.
Re-openings in many U.S. states and the start of the summer driving season have sent gasoline consumption in recent weeks to the highest since the pandemic started. Domestic airline travel is also bouncing back, though passenger throughput at airports is still at some 80 percent of pre-pandemic days. The higher fuel demand in the United States is tightening the market, and these bullish factors for oil consumption have started to become evident in the U.S. oil futures market.
Strong demand recovery in the U.S. has been the key reason for rallying WTI oil prices. This week, the Energy Information Administration (EIA) reported a crude oil inventory decline of 6.7 million barrels for the week to June 25. This was the sixth consecutive weekly drawdown in crude inventories.
In the past four weeks, the decline on a rolling basis of all U.S. crude inventories, including those in the Strategic Petroleum Reserve (SPR), has been at a pace of 1.15 million barrels per day (bpd), according to estimates from Bloomberg based on EIA data. The latest four-week drop in inventories was the biggest such fall on a rolling basis in EIA data going back to 1982.
Excluding the SPR, commercial crude oil inventories stood at 452.3 million barrels for the week ending June 25. That’s 15.2 percent lower than in the same week last year, and 3.4 percent lower than in the same, pre-pandemic, week in 2019, EIA data showed.
Inventories at Cushing, Oklahoma – the designated delivery point for NYMEX crude oil futures contracts – are also falling, further supporting the futures market. Crude stocks at Cushing fell by 1.5 million barrels in the week to June 25, and stood at 40.3 million barrels. This is a decline by 11.7 percent compared to this time last year and a drop of 23.3 percent compared to the same week in 2019.
Refineries are now operating at 92.9 percent capacity, slightly off the 94.2-percent capacity at this time in 2019, but a massive increase compared to the 75.5-percent capacity utilization at the end of June 2020.
That’s because U.S. demand is returning.
According to GasBuddy data, U.S. gasoline demand on Wednesday, June 30, surged 7.53 percent from the previous Wednesday, the highest Wednesday demand since the summer of 2019. This was also 7.48 percent above the average of the last four Wednesdays, due to the higher travel numbers ahead of July 4.
Airline travel is also back. The U.S. Transportation Security Administration screened 2,167,380 people at airport security checkpoints nationwide on Sunday, June 27, which was the highest checkpoint volume since the start of the pandemic, TSA Public Affairs spokesperson Lisa Farbstein said this week.
While demand is rebounding, U.S. crude oil production has remained relatively flat at around 11 million bpd in recent months, as the shale patch continues to exert previously unheard-of discipline in capital spending on drilling activity.
The restraint from U.S. producers is tightening the market at times of soaring demand and narrowing the discount of WTI to Brent.
“A tightening in inventory at the WTI delivery hub continues not to only support WTI timespreads, but also the narrowing in the WTI/Brent spread, which is now trading at a discount of around US$1.60/bbl,” ING strategists Warren Patterson and Wenyu Yao said this week. This discount is the narrowest since October 2020.
Time spreads are also showing how tight the market is. The premium of the September WTI contract was as high as $1.30 compared to the October contract early on Friday, as the backwardation in the curve deepened, signaling tighter immediate supply.
By Tsvetana Paraskova for Oilprice.com
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