Gasoline demand was one of the culprits in yesterday’s oil demise as demand slipped, causing problems for the Fed as Janet Yellen says all the pieces are in place for inflation. Yet the weakness in gasoline demand and economic data may suggest that we may be seeing some underlying softness in the economy. Now you might not think that if you look at the jobs reports and the help wanted ads but in general, the gasoline demand numbers don’t jive with a booming economy.

We were expecting to be seeing record demand but instead, we are seeing contraction and that may help to explain weak retail numbers yesterday as well as lack luster inflation. We don’t see yet gasoline demand going and one might wonder about the health of the U.S. economy as gas demand is a leading economic indicator. The Energy Information Administration (EIA) reported that gasoline inventories increased by 2.096 million barrels last week against market expectations of a 1,150 million-barrel draw. Demand was down from last week and over the last four weeks, motor gasoline product supplied averaged over 9.5 million barrels per day, down by 1.2% from the same period last year.

Still, the EIA reported crude oil inventories, provided many contradictions. The EIA reported that crude supply fell by 1.661 million barrels. Not as large as the 2.45 million barrels estimate but much larger than the American Petroleum Institute (API) that reported a 2.750-million-barrel increase. In Cushing, Oklahoma though we had a drawdown of 1,156 million barrels as opposed to the API reported 833,000-barrel drop. Refinery demand was strong as crude oil refinery inputs averaged about 17.3 million barrels per day as refineries operated at 94.4% of their operable capacity last week. 

Yet with weak gas demand and a negative report from the International Energy Agency, the mood was bad and it had a hard time seeing anything positive. Oil though, after falling, seemed to stop in mid-air not wanting to take out 4413 July on the May 5th crash low giving the market a least a shot for a recovery or even a bottom. What makes this day even more intriguing is the fact that today is the July crude option expiration that could lead to some interesting moves.

That $44.00 low is also critical for U.S. shale producers. U.S. oil production did rise again last week by 20,000 barrels but we are already hearing from some producers that they may have to contract if prices fall much further. Oil hedges that allowed many shale producers to operate have expired so they are naked and exposed to further downside in the market place. Such is the fate of producers that add production of light condensate into an already oversupplied market.

Yet heavier grades of crude should tighten further. Saudi Arabia is going to slow exports to the lowest levels in almost 30 years. U.S. imports last week averaged over 8.0 million barrels per day, down by 316,000 barrels per day from the previous week. Over the last four weeks, crude oil imports averaged about 8.2 million barrels per day, 7.1% above the same four-week period last year.

The EIA also reported that "For the first time, monthly electricity generation from wind and solar (including utility-scale plants and small-scale systems) exceeded 10% of total electricity generation in the United States, based on March data in EIA’s Electric Power Monthly. Electricity generation from both of these energy sources has grown with increases in wind and solar generating capacity. On an annual basis, wind and solar made up 7% of total U.S. electric generation in 2016. Based on seasonal patterns in recent years, electricity generation from wind and solar will probably exceed 10% of total U.S. generation again in April 2017, then fall to less than 10% in the summer months. Since 2014, when EIA first began estimating monthly, state-level electricity generation from small-scale solar photovoltaic systems, combined wind and solar generation have reached its highest level in either the spring or fall. Because these seasons are times of generally low electricity demand, combined wind and solar generation also reached its highest share of the U.S. total during these times of the year.”