DTN Oil

WASHINGTON, D.C. (DTN) -- After advancing more than 3% in the prior session, oil futures on the New York Mercantile Exchange (NYMEX) and Brent crude traded on the Intercontinental Exchange retreated Thursday as investors balanced concerns over rising tensions in the Middle East against inventory data showing U.S. gasoline and distillate fuel supplies spiked more than 20 million barrels (bbl) last week as demand slumped into the New Year's holiday.

U.S. Energy Information Administration's inventory report released late morning was overwhelmingly bearish for refined products, showing outsized builds across all three product categories amid exceptional demand weakness.

Nationwide gasoline inventories spiked 10.9 million bbl in the final week of December, distillate fuel supplies surged 10.21 million bbl and jet fuel stocks built by 2 million bbl. At the same time, gasoline consumption collapsed to the second lowest weekly rate of 2023 at 7.954 million barrels per day (bpd), down 1.24 million bpd or 13% from the previous week. While it's not unusual for gasoline demand to soften into the New Year's holidays, the curve of last week's decline was pronounced compared to pre-pandemic years.

There seems to be growing disconnect between the strength of U.S. labor market and gasoline demand that used to be closely correlated before the pandemic-driven lockdowns. For context, weekly unemployment claims in the final week of December dropped to a three-month low 202,000 applications but gasoline consumption eroded to a near recessionary level.

Demand for middle distillates didn't fare any better, eroding to the lowest weekly rate of 2023 at 2.658 million bpd, down 1.32 million bpd from the previous week.

Distillate fuel consumption closely correlates with nationwide industrial activity. The U.S. manufacturing index released by the Institute of Supply Management on Wednesday showed the industrial economy contracted for the 14th consecutive month in December.

Limiting the downside for the oil complex, tensions in the Middle East continue to rattle oil markets in the aftermath of the deadliest attack in Iran since its 1979 Islamic Revolution. ISIS claimed responsibility Thursday morning for the twin blast that killed over 80 people at the tomb of military General Qasem Soleimani. In initial response, Tehran blamed Israel for the attack and vowed to immediately retaliate, spiking tensions in a volatile region.

Robert McNally, president and founder of Rapidan Energy Group, estimates that there is at a minimum a 30% chance of material supply disruption in the Middle East at this juncture.

"While Tehran doesn't want the war, President Biden doesn't want the war -- no one is willing to de-escalate either. Everyone is escalating here over the holidays. The market is too complacent. I think there must be at least $12 of geopolitical risk premium," McNally told Bloomberg TV on Tuesday.

Separately, antigovernment protests in southern Libya shuttered the country's largest oil field, El Sharara, and the El Feel oil field, removing some 350,000 bpd from the global oil market. Both fields are in the Murzuq Basin in southern Libya jointly operated by Libya's state-owned company NOC, Spain's Repsol, France's Total, Austria's OMV and Norway's Equinor. Libya's oil fields and infrastructure have been frequently targeted by protestors and rival militias since the fall of Moammar Qadhafi in 2011.

At settlement, ICE March Brent futures fell $0.66 to $77.59 bbl after reaching an intrasession high of $79.41 bbl, and NYMEX February West Texas Intermediate futures declined to $72.19 bbl, down $0.51. NYMEX February ULSD futures dropped back $0.0160 to $2.5884 gallon, while NYMEX February RBOB futures retreated $0.0480 to $2.1101 gallon.

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