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U.S. gasoline and diesel inventories are drawing down and sitting below the five-year average for this time of the year, pointing to resilient fuel demand and supporting both crude oil prices and U.S. refining margins.
Although global refining margins have halved since February as Russian oil supply remains elevated despite the embargoes, U.S. refiners are optimistic about cracks going forward, and most do not see signs of fuel demand dropping.
As we head into the driving season and peak annual gasoline demand, the tight gasoline and diesel markets are bullish factors for oil prices. The oil market, however, is ignoring these fundamentals as investors and speculators focus on concerns about economic growth and a potential slip in fuel demand in case of a full-blown recession later this year.
In the week ending May 5, total motor gasoline inventories fell by 3.2 million barrels and were about 7% below the five-year average for this time of year. EIA data showed. Distillate fuel inventories declined by 4.2 million barrels last week and are about 16% below the five-year average for this time of year.
According to Reuters market analyst John Kemp, gasoline crack spreads remain strong ahead of the driving season, but diesel cracks are weaker amid concerns of weakening diesel demand, one of the first signs a recession may be looming.
Refining margins have fallen since the fourth quarter of 2022, but they are still higher than historical norms, executives at some of the top U.S. refiners said on the Q1 earnings calls earlier this month.
“Despite recent declines, refinery margins also remain well above mid-cycle, but have moderated from the distillate to ’22 levels. A key theme for 2023 is recovery in the demand for jet fuel and gasoline, supported by a stronger summer driving season,” PBF Energy’s CEO Thomas Nimbley said in early May.
Marathon Petroleum’s CEO Mike Hennigan also expects strong refining margins this year, although not as high as at the end of last year.
“We believe supply constraints and growing demand will support strong refining margins throughout 2023. Cracks have decreased from 2022 levels but still above historic mid-cycle levels,” Hennigan said on the earnings call.
“In alignment with what we said last quarter, we remain bullish into the driving season, and gasoline strength is expected to improve the diesel situation, while jet demand continues to improve. As we continue through the year, much will depend on the ongoing recovery in China and the extent, if any, of recessionary impacts,” he added.
Despite optimistic views on summer fuel demand, oil prices have fallen by $10 per barrel since the middle of April, erasing the gains they made after OPEC+ announced additional cuts through the end of the year.
Concerns about the economy and high interest rates have overshadowed signs that a market tightening is in the cards later this year, analysts and forecasters, including the International Energy Agency (IEA) say.
“The current market pessimism, however, stands in stark contrast to the tighter market balances we anticipate in the second half of the year, when demand is expected to eclipse supply by almost 2 mb/d,” the IEA said in its Oil Market Report this week.
According to the IEA, China’s oil demand recovery continues to exceed expectations, with March demand at an all-time high of 16 million barrels per day (bpd).
Economic data out of China, however, is weighing on sentiment, and many oil market participants view the Chinese economic rebound after the reopening as underwhelming.
“The risks remain tilted to the downside amid a sluggish recovery in China, uncertainty around the US economy and banking system, and the impact of much higher interest rates on demand,” Craig Erlam, senior market analyst at OANDA, commented on Tuesday.
“Perhaps Brent has simply consolidated for now in a $70-$80 range, with a move below here potentially difficult as the US seeks to refill the SPR at these levels, while OPEC+ wouldn’t hesitate to pull the trigger if prices slipped too far.”
