DTN Oil

WASHINGTON, D.C. (DTN) -- While crude futures, supported by a weaker U.S. dollar, settled Wednesday's session unchanged, RBOB and ULSD contracts traded on the New York Mercantile Exchange declined more than 2% after government data from the U.S. Energy Information Administration showed demand for refined fuels remains exceptionally weak at the start of 2023, adding to concerns over a frail manufacturing sector and possible recession.

Distillate supplied to the U.S. market -- a measure of demand -- fell below 4 million bpd last week, some 678,000 bpd or 14% below last year's consumption rate, showed government data released this morning. Distillate demand in the United States closely correlates with economic activity, with the middle of the barrel fuel mostly consumed in industrial and commercial sectors, including construction, trucking, farming and for heating.

Manufacturing conditions in the U.S. deteriorated significantly at the start of the year, hit by rising interest rates and a lack of consumer demand. For instance, New York manufacturing activity fell this month to the lowest level since May 2020 when the economy was shuttered by the COVID lockdown. On a national level, new orders across the private sector declined for the fourth successive month in January. Inflation, interest rates and customer hesitancy continued to be reported as driving the downturn.

Gasoline demand didn't fare much better at the start of the year, with the four-week average consumption falling to 7.8 million bpd as of Jan. 20^th, down 4.7% from the same period last year. A combination of weak fuel demand along with a slow recovery in refinery run rates pushed U.S. crude oil inventories to the highest level since June 2021. At 448.5 million bbl nationwide crude oil stockpiles now stand 3% above the five-year average. Oil stored at Cushing, Oklahoma hub, the delivery point for West Texas Intermediate, jumped 4.3 million bbl from the previous week to 35.7 million bbl.

U.S. refiners again increased run rates by a smaller-than-expected 0.8% last week to 86.1% of capacity after utilization fell to the lowest weekly level since Winter Storm Uri in February 2021 disrupted much of the refining capacity in Texas and Louisiana. Analysts mostly expected run rates to recover by 1.2% from the previous week.

For the week, refiners processed 128,000 bpd more crude at an average of 14.981 million bpd, which is still near the lowest processing rate since late March 2021.

Potentially lending support for the oil complex is solid manufacturing data out of the European Union and expectations for a demand rebound in China after the conclusion of Lunar New Year festivities. In Europe, manufacturing unexpectedly returned to positive growth this month, helped by easing natural gas prices and generous government assistance programs. Business confidence jumped higher, hinting at markedly improving prospects for the year ahead, with order books for both manufacturers and service providers showing reduced rates of contraction.

Within the Euro area, Germany reported only a slight drop in economic output, with the headline PMI rising to 49.7 -- the highest since output began falling last July. Manufacturing output in January declined at the same rate as in December, while services returned to growth with a 50.4 reading.

"A steadying of the Eurozone economy at the start of the year adds to evidence that the region might escape recession," commented Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. "The survey suggests that a nadir was reached back in October, since then fears over the energy market in particular have been alleviated by falling prices and warmer-than-usual weather."

At settlement, WTI for March delivery settled the session little changed at $80.15 bbl and Brent March futures on ICE finished at $86.12 bbl. NYMEX RBOB February contract declined to $2.5934 gallon, down $0.0553, and front-month ULSD futures fell $0.0659 to $3.3613 gallon.

Liubov Georges can be reached at liubov.georges@dtn.com