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Oil Jumps 6% After Spike in US Fuel Consumption, Tick Down in April Inflation

Published 05/11/2022, 01:28 PM
Updated 05/11/2022, 03:45 PM
© Reuters.

© Reuters.

By Barani Krishnan

Investing.com -- Oil prices jumped 6% on Wednesday, rising for the first time in three days and cutting by two-thirds losses on the week, after a tick down in U.S. inflation for April suggested the Federal Reserve might not go overboard in the near term with rate hikes that could tip the economy into recession.

Data showing weekly inventories of U.S. crude at nearly six times higher to expectations and at their largest in four weeks also did little to dissuade oil bulls from making a forceful return to the market. 

The focus instead was on last week’s outsized drawdowns in gasoline, as well as the distillates used for producing the diesel required for trucks, buses, trains and ships as well as fuel for jets.

New York-traded West Texas Intermediate, or WTI, the benchmark for U.S. crude, settled up $5.95, or 6%, at $105.71 a barrel.

WTI had retreated almost 9% earlier this week, hitting a two-week low of $98.65 on worries that the United States might fall into a recession from aggressive rate hikes by a Fed determined to beat inflation growing at its fastest pace in 40 years.

Brent crude, the London-traded global benchmark for oil, settled up $5.05, or 4.9%, at $107.51 a barrel. 

Like WTI, Brent had also fallen 9% on the week prior to Wednesday’s rebound, hitting a two-week bottom of $101.31.

“The volatility in crude is staggering as the market is being pulled in both directions; one side by fears of a U.S. recession and the other side by exuberance over the implied demand for fuel ahead of the summer,” said John Kilduff, partner at New York energy hedge fund Again Capital.

U.S. consumer prices rose 8.3% in the year to April, easing slightly from the 8.5% annual growth in March while keeping inflation not far from the four-decade highs seen since late last year, the Labor Department said earlier on Wednesday.

“We're in the process of rolling over from extremely high year-on-year inflation but the shape of that curve is in question,” economist Adam Button said in a post on the ForexLive platform. “Will it be a swift return to 2% inflation or a long, slow process?” 

The prospect of returning to 2% inflation is a key focus of the Fed. The central bank has penciled in seven rate hikes this year — the maximum possible under its calendar of monthly meetings in 2022 — and more rate revisions next year to achieve that 2%.

More perplexing to investors is the quantum of rate increases planned by the Fed for each month. As of now, officials at the central bank are debating the viability of a 75-basis point hike in June, after the 50-bps and 25 bps increases in May and March, respectively. A 75-bps hike would represent the largest upward adjustment in rates since 1994.

Aside from the benign consumer price print for April, crude prices were also boosted by the weekly oil inventory data released by the Energy Information Administration or EIA.

The Biden administration pulled a record 7 million barrels of crude from the U.S. Strategic Petroleum Reserve, or SPR, last week, as it kept up with unrelenting draws from the nation’s oil reserve in a bid to bridge a supply deficit and cool all-time highs in fuel prices.

The SPR’s stockpile for the week ended May 6 stood at 543 million barrels from a previous 550 million, which was already the lowest reserve level in 20 years, the EIA said in its Weekly Petroleum Status Report. 

The EIA report, released each Wednesday, showed that the Biden administration has taken 3 million barrels on the average out of the SPR every week over the past two months to help meet domestic refiners’ demand for crude. 

Global oil supplies are estimated to be in a deficit of five to seven million barrels per day versus demand, largely due to Western sanctions against Russia — one of the world’s largest energy exporters. A surfeit in fuel consumption amid strong economic recovery from the two-year long coronavirus pandemic has also left the market in deficit.

The Biden administration did its first major SPR withdrawal in November as oil supplies began tightening amid an uptick in demand. 

Last week’s SPR draw was, however, more than double the weekly trend as the administration entered an era of accelerated reliance on the reserve -- amid average pump prices of gasoline standing at all-time highs of $4.37 per gallon versus the year-ago average of $2.99.

For May through July, the administration has scheduled an SPR release of 180 million barrels — effectively one million barrels a day over 180 days.

The EIA report showed that as the SPR stockpile fell by 7 million barrels last week, the commercial crude inventory level rose by 8.5 million barrels. To the casual observer, it might suggest that the crude leaving the reserve had gone directly into commercial inventories. The EIA, however, says there’s a one-week lag in accounting between the two. 

Notwithstanding the crude draw, consumption of fuel products remained strong last week, with gasoline inventories seeing a slide of 3.61 million barrels versus a forecast draw of 1.6 million barrels and the previous week’s usage of 2.23 million barrels. Gasoline, known as petrol outside of the United States, is America’s premier automobile fuel product.

Distillates stockpiles fell by 913,000 barrels last week versus forecasts for a draw of 1.0 million, after the previous week’s consumption of 2.34 million. 

Distillates have been the strongest growth component of the U.S. oil complex for months, seeing virtually non-stop inventory declines since early January. As a result, pump prices of diesel have also hit record highs, averaging $5.55 a gallon versus the year-ago average of $3.13.

“The Biden administration is determined to use the SPR to the hilt to beat back the inflation in fuel. The reality is we aren’t seeing much reduction in what Americans are paying at the pump,” said Kilduff of Again Capital.

Despite crude’s drop from March highs of above $130, the retail price of gasoline has remained stubbornly at or above $4 per gallon over the past two months, prompting President Joe Biden to accuse energy firms of price-gouging at the pump.

Latest comments

So release petroleum from SPR and then you still have to buy more to replace the draw down. you have to actually create more supply to lower prices. Or are we going to leave the strategic oil reserve empty or low while we are at war with Russia and china getting ready for a hit in Taiwan.
Wall Street and its puppets at work.. Got zero to do with real life
Oil bounce back because Inflation while more inflation because high oil price.
Big piece of inflation is oil which money flow keeps pouring info from tech keeping inflation high which causes more sell off in tech to buy more oil rinse and repeat.
Gbp:usd whats next bull or bear
Benign inflation? What are they looking at. Double digit PPI here and CPI soon will follow.
As per the CPI year-on-year print of 8.3% for April vs the March annual rate of 8.5%. "Benign" qualifies now for anything below 8.7% and above.
received
"Benign" inflation data? 8.3% is benign to you? What is a high inflation reading to you?  :) Can't make up how bad you are as a writer and analyst if this is your take.
Pen Fifteen, try reading the first paragraph at least for context before screaming from your armchair at the headline. LOL
 Dude you edited it from the original and edited the first paragraph.  But keep saying I'm twisting words when you CHANGED the original after I commented.  You still know nothing, and this drivel confirms you aren't even honest about it.
 Look wise guy: We edit our headlines and stories several times in a day to update price moves or lend context to what's going. In this case, a headline about a spike in US fuel consumption and tick down in April inflation seemed a better catch-all to today's narrative. That said, I maintain what I reported earlier: that a CPI year-on-year print of 8.3% for April vs the March annual rate of 8.5% is considered "benign". Prior to the data, some folks I spoke to were expecting an annual print of between 8.7% and 8.9% for April. So this is benign compared to those expectations. Of course, what the Fed does, ultimately, is beyond anyone's call. I made my reply to you well before the last edit and you're responding belatedly. In any case, look at paragraph 13, where "benign" is still there. Peace!
In other words draining the SPR has only slowed the inevitable. Meanwhile we head into hurricane season with triple digits. Gotta say this is not setting up so well for the general economy.
GG, it is what it is ... unfortunately.
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