Oil market fears recession more than tight fuel stocks

The oil market wrapped up another volatile week of hectic trading, swinging up and down in the $5 a barrel range as it was torn between bullish and bearish catalysts back and forth each day. The two landmarks reached an eight-week high early Tuesday, only to pull back later in the day and join the selloff on Wall Street on Wednesday sparked by renewed investor concerns over a possible recession as major retailers flagged soaring costs and chain bottlenecks in their quarterly results reports.

In the week leading up to May 20, oil market participants paid more attention to ‘recession scare’ headlines than to the weekly report on the state of US oil, which showed a new lower gasoline inventories and higher implied domestic demand, which – despite record high gasoline prices in America – is only expected to rise further as we enter the summer driving season.

“The market is reacting to all sorts of headlines hour by hour, and the movement of day-to-day oil markets is getting even more exaggerated,” said Andrew Lipow, president of Lipow Oil Associates in Houston. Reuters Thursday, when oil stabilized after the weakening of the U.S. dollar, following a drop in crude prices in earlier trading on the same day.

Overall, the market seemed more concerned with the growing likelihood of a recession than with US fuel inventories falling to multi-year lows for this time of year. Investors and speculators retreated from oil, with crude a riskier asset, as worries about a deeper global economic slowdown – and even a recession – intensified and dampened risk appetite.

“The possible easing of US sanctions against Venezuela could be seen as another bearish factor, coming on top of Hungary’s veto on the EU’s plan to ban Russian oil,” wrote Sébastien Bischeri, trading strategist. oil and gas at Sunshine Profits. invest.com.

The EU is still struggling to convince Hungary to accept a European embargo on Russian oil imports. New COVID outbreaks in China, where Shanghai is tentatively reopening but infections are rising in the Beijing area, added to the downside factors.

However, as the market focuses on a bleaker economic outlook, it has ignored, at least for the past week, extremely low US fuel inventories.

Not that the demand for oil has increased so much. It is supply capacity, globally and in the United States, it is now a few million barrels per day less than before the pandemic. Growing demand since economies reopened and travel resumed, combined with weaker refining capacity and very tight distillate markets, has pushed U.S. product inventories below seasonal averages and to multi-year lows, with record stocks reported on the East Coast.

Total motor gasoline inventories were down 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 agency said. ‘EIA in its latest weekly inventory. report May 18. Implicit demand for gasoline, measured in products supplied, increased, despite record high prices in the United States.

U.S. gasoline inventories are at their lowest level for this time of year since 2014, with East Coast inventories even tighter at their lowest since 2011 for this time of year.

Related: EU faces same hurdles over Russian oil tariffs as embargo

“While refiners have some room to increase runs (utilization rates rose 1.8 percentage points to 91.8% during the week), gasoline demand is expected to increase as we are entering driving season, which suggests that we will see renewed tension in the US gasoline market. In this case, we are likely to see additional pressure on the US administration to try to rein in gasoline prices,” said ING strategists Warren Patterson and Wenyu Yao. wrote Thursday.

According to Bjarne Schieldrop, Chief Analyst, Commodities, at Seb:

“The global refining system is highly strained following capacity cuts in 2020/21, the revival of demand for petroleum products as well as re-openings with Russia/Ukraine issues in mind. We are now heading into the refining season. summer driving with a much higher demand for gasoline with a very low starting inventory.

Concerns about economic growth, and therefore demand for fuels, are not yet reflected in real data, Saxo Bank mentioned Thursday.

“On the ground, however, this worry has yet to be reflected, with crude oil and gasoline inventories continuing to fall while implicit demand for gasoline in the United States, despite record prices, remains robust. ”

“Meanwhile, in China, the easing of lockdowns is not going well with further outbreaks slowing the pace towards normalization. Until then, the market should focus on the general level of risk appetite, which is currently contested,” Saxo Bank’s strategy team noted.

By Tsvetana Paraskova for Oilprice.com

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