Economic Optimism Accelerates As U.S. Summer Driving Season Kicks Off

Despite the chronic concern about the state of the U.S. economy and its immediate prospects, the first weeks of the summer driving season have given traders reason for hope.

Rising retail prices, declines in inventories, and higher refinery runs have combined to paint a picture of a strong start to the season of peak demand in the world's largest consumer. This suggests things are not as dire as economic indicators would have market players believe.

Recent purchasing manager index data, for instance, suggested a continued contraction of activity in the manufacturing sector. This contributed to the spread of pessimistic feelings about the state of the U.S. economy with the resulting pressure on oil prices.

Yet, the latest inflation data is quite optimistic: inflation went up by 4% on an annual basis last month, the Labor Department reported earlier this week. While not exactly perfect, the number represented a modest, 0.1%, increase on April. This was the smallest monthly increase since March 2021.

As consumer prices fell, the appetite for spending apparently increased, and even the rising prices at the pump failed to affect normal seasonal demand. In fact, prices did not even rise everywhere with the start of summer driving season.

Prices rose in Florida and are still on the rise thanks to soaring travel demand. In California, on the other hand, prices actually fell in late May. Reuters called the state of the fuels market at the time a Goldilocks market, noting strong production that has kept prices in check.

Yet strong production has been accompanied by strong oil exports. With the EIA expecting growth to begin slowing down in the second half of the year, if demand for fuels remains strong, the Goldilocks situation might take a turn for the worse, from the consumers' perspective. Related: Bacteria Breakthrough Could Simplify Rare Earth Element Processing

A rate hike pause is also a factor conducive to higher oil-and fuel-prices, which might begin eating into demand for the latter at some point. On the other hand, the latest inventory data from the American Petroleum Institute showed a build in gasoline inventories, suggesting that demand is not that strong, after all.

Of course, the estimated build could simply be a result of more crude getting refined rather than demand being weaker than expected. And then there is always the possibility of analysts-and traders-having unrealistically high expectations about summer driving season demand.

Prices appear to reflect this balance between demand and supply. According to the AAA, gasoline prices have risen relatively modestly over the past month while being substantially lower than a year ago.

The data shows that the national average for the third week of June was $3.592 per gallon, which was a bit higher than the $3.545 per gallon that was the average price a week earlier and higher still than the month-ago average, which stood at $3.537 per gallon.

Compared to this time last year, however, prices have plummeted: the average for mid-June 2022 was over $5 per gallon. It makes perfect sense since crude oil prices have declined by some 31% in the period, too. Refiners seem to be fine with the current fuel price levels and continue to operate at over 90% of capacity.

The problem is that fuel inventories are relatively tight, Reuters noted in a recent report. Even with several weekly increases, gasoline inventories are tight enough to prompt a price surge in case of a refinery outage. And such outages are common when hurricane season overdelivers.

For now, the National Oceanic and Atmospheric Administration predicts a near normal hurricane season as it called it in late May, predicting a 30% chance for above-normal season and assigning the same probability to below-normal season. In the near-normal scenario the NOAA has predicted between 1 and 4 major hurricanes and between 12 and 17 named storms.

Yet hurricane season is not the only factor that can get the U.S. fuel market out of the Goldilocks zone. China's oil demand has risen strongly since the start of the year, despite mixed signals from its economic indicator trackers. If the strong rise continues, this would begin affecting U.S. crude prices.

Then there is OPEC and the voluntary cuts several of its members have agreed to implement as a market-control tool. The cartel earlier this week reported production numbers for May, which showed a decline of over 460,000 barrels daily. And that was before Saudi Arabia announced its additional voluntary cut of 1 million bpd. It takes effect next and will significantly push down the combined OPEC and OPEC+ total.

For now, driving season seems to be going great, with both refiners and drivers happy with where prices are. Yet the situation with supply and demand remains fragile. It would be easy to knock it out of balance both from the supply and from the demand direction, both due to local and international factors.

By Charles Kennedy for Oilprice.com

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