DTN Oil

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and the front month Brent crude contract on the Intercontinental Exchange moved lower in early trading Friday ahead of employment data in the United States and following Thursday's advance off multiweek lows bolstered by strong U.S. oil products demand leading up to the Independence Day holiday.

Oil futures had rallied early Thursday ahead of the release of weekly inventory data from the Energy Information Administration after two sessions of steep losses on worries of lost demand amid slowing economic growth throttled by high inflation and rising interest rates. The relief rally was initially bolstered by a surge in oil products supplied to the U.S. market in closing out the second quarter, with gasoline up 5.5%, distillate fuels surging 22.8%, and jet fuel climbing 21.7%, with implied jet fuel demand reaching the highest weekly rate since before the pandemic in December 2019. However, on a four-week average, only jet fuel demand is higher against the comparable year-ago period, up 15%, while implied gasoline demand is down 5.5% and distillate demand is down 5.3%.

Historically, implied gasoline demand climbs ahead of July 4th as suppliers position inventory for quick dispatch to retail outlets during the busy driving holiday weekend and falls off the following week. Moreover, as EIA noted Thursday in a separate weekly report, after strong demand growth for the fuel from mid-2020 through the first quarter, the trend reversed in April. EIA notes the influence of employment, vehicle efficiency, prices and, obviously, vehicle miles traveled on gasoline consumption.

While employment gains have been robust, even if monthly job growth has trended lower as it is expected to have done again in June, commuter travel is well below pre-pandemic levels, with workers by large numbers preferring to work from home while high crime in major cities has been another detrimental factor in limiting the return to work. Additionally, retail gasoline prices crested over $5 gallon nationally for the first time in U.S. history in June, which coincided with lower discretionary spending by consumers, who were the most pessimistic over their economic prospects in at least 60 years, based on the University of Michigan's Consumer Sentiment Index created in 1946.

EIA, which noted despite the mid-2021 to first quarter growth in gasoline consumption that it was still below the pre-pandemic level, said gasoline demand from April through the first week of July averaged 8.9 million bpd, 200,000 bpd or 3% less than the comparable period in 2021, while the lowest consumption rate since 2001 after stripping out 2020 -- the year of pandemic lockdowns.

Even as retail gasoline prices have slipped below $5 gallon, with AAA reporting the U.S. average for regular grade gasoline at $4.721 gallon today, having now fallen 24 consecutive days from a record $5.016 on June 14, inflation pressures will keep consumers in a foul mood while limiting their spending. Moreover, climbing interest rates will further cut into household budgets, with the Federal Open Market Committee widely expected to lift the federal funds rate another 75 basis points when they meet July 26-27 to fight inflation. Most FOMC participants as of June 15 anticipated the federal funds rate ending 2022 at 3.25%, up from a 1.5% to 1.75% target range now.

FOMC participants recognize their efforts to fight inflation by increasing interest rates could slow economic growth, but that they would maintain the tightening cycle until prices stabilized, which is one of their two mandates. Fed critics have argued the Fed responded too slowly to inflation pressure and will need to be more aggressive as a result, which they say will push the U.S. economy into recession. Atlanta Federal Reserve Banks GDPNow tracker, which will be updated today, is signaling the U.S. economy is already in recession, with their nowcast reporting a 1.9% contraction for the second quarter.

U.S. Bureau of Labor Statistics this morning will release its Employment Situation Summary for June, with the market expecting job growth of 270,000, down from 390,000 in May. The Department of Labor on Thursday reported 235,000 first-time unemployment claim filings for the week ended July 2, the most since January.

Shortly before 8 AM ET, NYMEX August West Texas Intermediate futures were little changed at $102.55 bbl, and ICE August Brent was flat at $104.65 bbl. NYMEX August RBOB futures were down 4 cents near $3.80 gallon, and August ULSD futures were 9 cents lower near $3.5840 gallon.

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