DTN Oil

CRANBURY, N.J. (DTN) -- Oil futures nearest delivery on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange made robust gains from 10-week or better lows Thursday. The moves were in reaction to a sharp recovery in oil products demand in the United States in closing out the second quarter. Yet, the rally stalled as inflation pressures and the threat of lower consumption amid a possible recession slowed buying interest.

Late Thursday morning, the Energy Information Administration reported gasoline supplied to the U.S. market surged 491,000 barrels per day (bpd) to a 9.413-million-bpd 2022 high, distillate fuel supplied to the domestic market spiked 814,000 bpd off an 11-week low to 4.382 million bpd, and jet fuel supplied to the U.S. market jumped 321,000 bpd to 1.801 million bpd -- the highest weekly implied demand rate since before the pandemic in late 2019.

The strong demand led to inventory draws for all three products even as production of the fuels was robust -- at a one-year high for gasoline and nearly 2 1/2-year high for distillate fuels. Certainly at first blush a bullish data set, with a sizable 8.2-million-bbl build in commercial crude stocks partially explained away by a 5.8-million-bbl drawdown in Strategic Petroleum Reserves and 768,000-bpd drop in crude exports that might have been lowered by a tropical disturbance along a portion of the Texas coastline north of Corpus Christi late last week.

Yet only implied jet fuel demand is up against a year ago during the most recent four weeks through July 1, averaging 15% above the 2021 rate at 1.623 million bpd. Implied gasoline demand during the four-week period is down 521,000 bpd or 5.5% at 8.983 million bpd, and implied distillate demand 215,000 bpd or 5.3% lower over the period against year prior at 3.858 million bpd.

Historically, implied gasoline demand is higher before Independence Day as suppliers position product closer to retail outlets to satisfy holiday travel demand and falls off the following week. EIA's implied demand figure is a calculation based on production, imports and exports, and inventory disappearance, so might be skewed.

The spike in implied distillate fuel demand runs contrary to slowing manufacturing activity in June, while the most recent data on construction spending from the Census Bureau is for May showing a modest 0.1% decline. Diesel demand correlates closely with economic activity in the United States, with the GDPNow tracker from the Federal Reserve Bank of Atlanta indicating a 1.9% decline in second-quarter U.S. gross domestic product.

A host of analysts have noted the challenges in sizing up U.S. economic strength in recent weeks because of the unusual effect the pandemic lockdowns and subsequent massive federal subsidies and cash payments made to companies and individuals have had on demand and behavior.

Minutes for the Federal Open Market Committee's June 14-15 meeting released Wednesday afternoon highlight this point, noting, "conflicting signals recently regarding the pace of economic growth, making it challenging to determine the economy's underlying momentum."

Further rate hikes by the Federal Reserve, with another 75-basis point increase in the federal funds rate widely expected later this month, would also slow economic activity and has the potential to tip the U.S. economy into recession if we're not already in recession. Fed critics say the central bank fell behind the inflation curve and will need to be more aggressive in reining in inflation now at a 40-year high that is likely to lead to a "hard landing" for the economy.

NYMEX August West Texas Intermediate futures settled with a $4.20 gain at $102.73 per bbl, and ICE Brent ended the session $3.96 higher at $104.65 per bbl. NYMEX August RBOB futures advanced a sharp 18.38 cents to a $3.4204 settlement, and August ULSD futures rallied 26.33 cents off a 13-week low to settle at $3.6739 gallon.

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