By Barani Krishnan
Investing.com - The oil rally isn’t slowing, with U.S. crude prices rising another 5% Wednesday. But demand for gasoline itself seems to have slowed ahead of the all-important U.S. Memorial Day weekend.
Crude stockpiles in the world’s largest oil producing country fell by about 5 million barrels for the week ended May 15, the Energy Information Administration said in its weekly update. The drop confounded a market expecting a 1.2-million-barrel build in crude for last week.
Adding to that, inventories also fell by 5.8 million barrels at the Cushing, Okla. storage hub for crude delivered against expiring contracts of the U.S. West Texas Intermediate benchmark. That adds to the 3-million-barrel decline at Cushing during the week to May 8.
And like the cherry atop the pie, U.S. crude production also fell last week, sliding by an estimated 100,000 barrels per day to extend the previous week’s 300,000 bpd drop.
Crude output as a whole has fallen 1.6 million barrels from a record high of 13.1 million bpd in mid-March to 11.5 million last week, as energy firms across the United States idled more than 60% of the rigs actively drilling for oil and closed a substantial-but-unquantified number of oil wells too in response to the pandemic,
Despite the losses in crude output, the United States remains the world’s largest oil producer. But it is now just 2 million bpd above Russia, which produced between May 1 and 19, according to a Reuters report on Wednesday.
The combined declines in crude stockpiles and production helped WTI’s new front-month, July settle up $1.53, or 4.8%, at $33.49. The session peak for July WTI was $33.74, its highest in nine weeks.
Brent, the London-traded global benchmark for oil, settled up $1.10, or 3.2%, at $35.75.
Notwithstanding the vigor of bulls, analysts are cautioning that a more than tripling of U.S. crude prices from a low of just around $10 a barrel three weeks ago meant that demand had to step up too, not just production cuts.
“Demand is recovering yes, supply is shrinking, storages start to draw – maybe not the floating ones, but there is still a gap between supply and demand,” Igor Windisch at the Geneva-based IBW Daily Oil Brief wrote.
“And higher prices could make things worse if U.S. producers decide that it is time to open rigs and wells again at these reasonable prices. So, going higher than $32 for WTI may not be advised for now.”
Such caution comes as gasoline inventories gained unexpectedly by 2.8 million barrels, versus forecasts for a drop of about 2.1 million barrels.
The gasoline build suggests refiners had continued ramping up production of the motor fuel last week in anticipation of some return at least in weekend road travel for the upcoming Memorial Day weekend. But the build, the first in four weeks, also indicates that net demand for gasoline may have slowed.
That might be a problem as gasoline has, so far, been the catalyst of the oil price rebound, aside from cratering production.
Diesel, the market’s other major fuel component, has been hopeless in terms of demand, with inventories growing more than expected for the past six weeks as U.S. trucking and other commercial transportation activity remains subdued.
Distillate stockpiles rose by 3.8 million barrels last week, compared with expectations for a build of about 1.43 million barrels.