Yesterday, WTI Crude prices hit a new post-pandemic high (though retraced a bit later in the session). The focus is now on the inventory data coming out tomorrow to see if there is likely to be another push higher.
Alternatively, we could see some leveling off as the market waits for key economic data at the end of the week (jobs and inflation data).
A lot of the popular press has been focusing on a quirk of last week’s EIA report, showing the US “imported” 2M barrels of oil from Iran. It came from a seized tanker and might have some political implications.
However, it’s not the first time that the US has seized a tanker and then sold the oil on the domestic market. And it likely won’t have a major impact on price development.
The underlying issues
Gas prices at the pump in the US have moved higher this year. Not just higher than last year, which is expected because of the pandemic, but higher than the pre-covid 5-year average.
Around 20% higher, as a matter of fact. This is the most expensive cost for gasoline and diesel fuel for Americans since at least 2014.
Will that discourage driving to level off the price? Well, Memorial Weekend is sort of the start of the unofficial “vacation season” when Americans drive more. This season lasts until around October when gasoline prices are typically ~10% higher.
Higher price at the pump means higher crude prices?
Mobility trackers show that US drivers are back on the roads. In fact, there are 17% more drivers than last year, which is comparable to pre-pandemic levels.
The increased costs of fuel over the weekend are attributed to lack of inventory. By now, the pipeline situation has completely normalized, suggesting that wholesalers will need to increase their stocks to meet the demand. In other words, we could see US consumer demand as a tailwind for oil price until October.
While average gasoline demand is in line with the pre-pandemic average, the supply is still around 7% lower. Suppliers might still be hesitant to increase inventory, as there is uncertainty about how much real demand remains.
The AAA expects that there will still be lower overall travel demand this year compared to 2019.
Supply coming back online?
With the cost of petroleum rising, US domestic supply is also increasing, with March recording record increases in both natural gas and liquids.
While the new administration has sought to curtail future US production by not allowing new fracking, current wells can continue to operate and can expand production in the case of higher fuel prices.
Meanwhile, inflation expectations continue to be high. In fact, some economists are projecting a period of high inflation and low economic growth for the next few years.
Other economists, notably in the Fed, say that we would need job growth before a significant amount of inflation is recorded. This is why oil traders might be a bit hesitant to back higher prices at least until Friday’s NFP report.
There, we might see a correction from last month, increasing fears of inflation, and rising oil prices. Alternatively, we could see a doubling down on poor metrics, and then worries of economic stagnation, and weaker oil prices.
