Oil Futures End Lower While Some Fed Officials Note Inflation

Brian L Milne
By  Brian L. Milne , DTN Refined Fuels Editor

CRANBURY, N.J. (DTN) -- New York Mercantile Exchange oil futures nearest delivery and the front-month Brent contract on the Intercontinental Exchange ended Wednesday's session lower in whirlwind trading, moving off lows after testing technical support following weekly inventory data that showed a larger-than-expected build in U.S. commercial crude stocks. West Texas Intermediate was further pressured by a strengthening U.S. dollar, which peaked following the release of Federal Open Market Committee minutes showing some members expressed concern over inflation risk.

Supply data for the week ended May 14 released at midmorning by the Energy Information Administration would have been bullish on most Wednesdays if not following the five-day outage on the Colonial Pipeline which led to a 1.3 million-barrel (bbl) increase in commercial crude stocks that, while larger than a consensus of estimates, was hardly that bearish. More so considering a 1.9 million bbl drawdown from the Strategic Petroleum Reserve for the week. On a forward supply basis, crude ticked down to 32.2 days of supply according to the EIA, the first time in 2021 it matched the three-year average while crude exports jumped 1.51 million barrels per day (bpd) to 3.306 million bpd last week.

Implied demand data would have sparked a rally most Wednesdays too, with EIA reporting gasoline supplied to the U.S. market up a sharp 434,000 bpd during the second week of May to a 9.224 million bpd 14-month high. It was only the third week with implied gasoline above 9 million bpd since COVID-19 was declared a pandemic in March 2020, with the demand surge coming two weeks ahead of the Memorial Day weekend -- the unofficial beginning of the summer driving season.

However, the May 7 cyberattack on the Colonial Pipeline that prompted the operator to shut down the 2.5 million bpd 5,500-mile pipeline network that provides 45% of the gasoline, diesel and jet fuel consumed along the Eastern Seaboard for five days was anomalous, sparking panic buying by consumers that suggests the strong pull on inventory has left motorists flush with gasoline. Curiously, panic buying was not restricted to the U.S. Southeast and mid-Atlantic states where the pipeline provides supply, with the pipeline outage pumped by social media leading to curious human behavior. As of 9 a.m. EDT, GasBuddy reported 9,508 gas stations in 15 states and the nation's capital were out of gas, with 60% of the gas stations in Washington, D.C., still out of the transportation fuel. Stripping out Texas and Louisiana, states with the refineries that supply the Colonial Pipeline, there are nine states the pipeline traverses.

The pipeline outage and panic buying also pushed the national retail price of gasoline above $3 gallon to $3.028 gallon as of Monday, according to EIA's weekly survey. The round-number benchmark could have a psychological impact on some motorists that either abandon or pare back planned travel during the Memorial Day holiday.

The strong price signals transmitted last week will also lure foreign cargos of gasoline to the U.S. East Coast, where imports have been strong since late in the first quarter. EIA reported PADD 1 gasoline imports at 910,000 bpd during the week ended May 14, the third time above 900,000 bpd in 2021 while averaging 826,857 bpd so far in the first quarter.

Traders can also expect a couple of waterborne cargos from the U.S. Gulf Coast to be offloaded in the New York Harbor in May following the waiving of the Jones Act by Homeland Security head Alejandro Mayorkas in response to the pipeline outage. Valero and Citgo both received waivers from using Jones Act compliant vessels, which are limited in number and cost more when transporting fuel. Reports indicate the waiver will allow Citgo to transport 200,000 bbl of refined fuel from its refinery in Louisiana to New Jersey, with Valero expected to move a similar amount of fuel.

The Jones Act is a 101-year old maritime law requiring a vessel be U.S. built, flagged, owned, and crewed in moving from one U.S. port to another. Government officials noted these were restricted waivers to avoid offending special interest groups and keep them from howling.

Oil futures were already under pressure on concerns of increased oil exports from Iran amid speculation Washington and Tehran were nearing agreement in reinstating the 2015 Joint Comprehensive Plan of Action that the United States withdrew from in May 2018 during the Trump administration. Tehran has been adamant that all sanctions on its economic activity, including oil exports, be removed before returning to the agreement.

A rally in the U.S. dollar, albeit from a three-month low, also weighed on oil futures, with the dollar reaching a session high 90.280 in index trade following the release of minutes from April's FOMC meeting indicating some central bank officials expressed concern over inflation.

While highlighting an improving economy -- yet one needing the central bank's monetary easing policies to endure longer before reaching its goal in achieving greater employment -- "a couple of participants commented on the risks of inflation pressures building up to unwelcome levels before they become sufficiently evident to induce a policy reaction," according to the minutes.

Earlier this month, the Bureau of Labor Statistics shocked the market in showing the Consumer Price Index in April increased 4.2% on the year, the fastest advance in the inflation indicator since September 2008, the same month Lehman Brothers collapsed.

"A number of participants" also suggested the Federal Reserve could begin discussing tapering the pace of asset purchases. While advocating for advanced communication to the market before making these adjustments, the recent strong economic growth and jump in inflation has given the market, which expected easy money policy to continue for same time, jitters that the Fed might be forced to tighten up quicker than previously anticipated.

NYMEX June WTI futures settled at a $63.36 bbl three-week low, paring a decline to $61.95 bbl ahead of expiration Thursday afternoon, with July futures settling at $63.35 bbl. ICE July Brent futures settled the session at a $66.66 bbl three-week low on the spot continuous chart, down $2.05 bbl. NYMEX June RBOB futures settled down 5.89 cents at $2.1020 gallon, and June ULSD futures ended session trading at $2.0071 gallon, down 4.93 cents.

Brian L. Milne can be reached at brian.milne@dtn.com

Brian Milne