Photo by Zbynek Burival on Unsplash

Maybe California does not want Governor Newsome’s $7 a-gallon gasoline. A stunning 6006.000 barrel-a-day weekly drop in gasoline demand, which may have been exaggerated, showed at the very least physical buyers of gasoline have had enough of rising prices. It also shows that the oil market which had largely ignored the threat from sharply rising interest rates, is now giving in to fears that the economy can’t handle it anymore despite the slow growth in manufacturing and an OPEC cartel that along with Russia continues to largely control the swings in global oil supply despite increases in non-OPEC production.

Oil prices got crushed by 5.6% to $84.22 a barrel on concerns about the global economy and the political uncertainty here in the United States. This came even as OPEC and Russia decided to extend their voluntary production cuts by 1.3 million barrels a day at the end of the year and the fact that the US Strategic Petroleum Reserve supplies are at the lowest level in history which is raising concerns about the energy security in the United States.

We saw for example a report this week that showed that the US Strategic Petroleum Reserve only has 17 days of supplies which is roughly half of the historical average of 33 days of supply.

This becomes even more critical as OPEC and Russia continue to squeeze the global market by withholding supply. Now if you look at the fact that we’ve seen rising interest rates and the corresponding drop in gasoline demand, it’s raising concerns that the US consumer has hit a brick wall when it comes to their spending power.

As far as overall crude supply, if demand holds up, it is still uncomfortable and tight. Commercial Inventories U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) decreased by 2.2 million barrels from the previous week. At 414.1 million barrels, U.S. crude oil inventories are about 5% below the five-year average for this time of year. Now compare the previous thoughts on the SPR and it’s clear that despite the plunger in the market, we are still too tight to be complacent.

As we have written before, we thought that $95.00 a barrel would be tough resistance. Now that we have pulled back dramatically from that area basically on fear trade and the fact that we are in the shoulder season, those who missed the last rally should use this break to protect against upside price risk.

We believe that the sell-off is a correction and not a top and while the next few trading sessions will be crazy, there is value in oil at these levels. That is especially true at the back end of the oil curve.

On the product side, the gasoline demand plunge led to a huge gasoline build that took supplies from a deficit against the five-year average to a surplus. The EIA reported that total motor gasoline inventories increased by 6.5 million barrels from last week and are about 1% above the five-year average for this time of year. Both finished gasoline and blending components inventories increased last week. Distillate fuel inventories decreased by 1.3 million barrels last week and are about 13% below the five-year average for this time of year.

On the demand side, it is still looking good based on the four-week moving average even with the gasoline most likely exaggerated demand drop. Total product demand over the last four-week period averaged 20.3 million barrels a day, up by 1.7% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 8.3 million barrels a day, down by 5.0% from the same period last year. Distillate fuel product supplied averaged 3.9 million barrels a day over the past four weeks, up by 4.8% from the same period last year. Jet fuel product supplied was up 10.6% compared with the same four-week period last year.

Natural gas bucked the trend as the weather looks to go from hot to cold. The EIA reported that U.S. exports of natural gas set a record high in the first half of 2023.

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