DTN Oil

CRANBURY, N.J. (DTN) -- Nearest delivered oil futures on the New York Mercantile Exchange and Brent crude on the Intercontinental Exchange settled lower Friday, reversing overnight gains as sluggish fuel demand in the U.S. so far this year is seen continuing in the weeks ahead amid consumer pessimism.

The latest blow to market sentiment was the University of Michigan's consumer sentiment index for early May released Friday which fell a steep 12.7% from April to a six-month low of 67.4. Growing pessimism over inflation, higher-for-longer interest rates and unemployment registered across the demographic landscape.

"Consumers in western states exhibited a particularly steep drop [in optimism]," said Joanne Hsu, director of the Surveys of Consumers.

Year-ahead inflation expectations increased 0.3% from late April to 3.5%, well above the pre-pandemic two-year average 2.3% by 3% range, she said.

Consumer pessimism is toxic for discretionary spending and driving demand. In its April 30 survey release, The Conference Board also reported souring consumer confidence and noted three of the top four discretionary spending categories that customers said they would cut back on over the next six months to save money directly affect gasoline demand. They include dining out, entertainment away from home, and vacations.

Fleeting consumer confidence is reflected in the Energy Information Administration's (EIA) gasoline supplied to the U.S. market data set, with the demand proxy down 1.6% cumulatively in 2024 against the comparable period a year ago, accelerating during the four weeks ending May 3 to 4%. Vehicle efficiency gains also reduce gasoline demand.

RBOB futures fully retraced its March-April uptrend this week, sinking to a $2.4826 10-week low on a spot continuous basis, settling Friday's session down $0.0421 at $2.4997. June RBOB lost $0.0554 or 2.2% this week, with the seasonal high likely registered on April 12 at $2.8516 per gallon.

In the confusing economic landscape post-pandemic, the probability for two 25-basis point reductions in the federal funds rate in 2024 diminished on Friday from 61% to 52.6%, according to the CME FedWatch Tool. The current policy rate is in a 5.25% by 5.5% target range.

Expectations for higher-for-longer interest rates find support in the Atlanta Federal Reserve Bank's GDPNow indicator which calls for second-quarter U.S. gross domestic product growth of 4.2%.

"(T)he nowcasts of second-quarter real personal consumption expenditures growth and second-quarter real gross private domestic investment growth increased from 3.2% and 4.1%, respectively, to 3.9% and 6.8%," from May 2-8, according to the Atlanta Fed.

Strengthening economic growth would fuel inflation pressure, prompting the Federal Reserve to delay interest rate cuts.

Despite the suggested strength in the U.S. economy, distillate fuel demand has been a laggard, down 4.9% cumulatively in 2024 against a year ago, while 6.6% below the year-ago product supplied rate in 2023 during the most recent four weeks, EIA data shows. Weak manufacturing activity and freight hauling have cut into petroleum-based diesel demand, with the sharp growth in renewable diesel consumption further limiting distillate fuel demand.

June ULSD futures settled $0.0432 lower at $2.4344 per gallon Friday, while down $0.0090 on the week. On May 2, ULSD futures fell to a $2.4219 10-month low on the spot continuous chart.

With a reduction in the geopolitical premium in oil prices following an April runup, the U.S. and international crude contracts came under pressure from softening fuel demand. June West Texas Intermediate settled down $1 on Friday at $78.26 per barrel (bbl), moving off a $76.89 eight-week low on a spot continuous basis, while up $0.15 from the prior Friday.

July Brent futures ended down for both the session and the week, falling $1.09 on Friday to $82.79 bbl while down $0.25 this week. Brent traded at a $81.71 eight-week low on the spot continuation chart on Wednesday.

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