U.S. petroleum inventories are low despite massive releases from the strategic reserve over the last year and signs the economy and fuel consumption are slowing.
Inventories of gasoline and diesel are particularly low for the time of year, which has kept prices firm even as crude prices have slipped back since the middle of April.
Total petroleum inventories including the government’s strategic reserve have fallen in 105 of the last 148 weeks by a total of 521 million barrels since the start of July 2020.
Total inventories stood at 1,597 million barrels on May 5, which was -289 million barrels (-15% or -2.52 standard deviations) below the prior ten-year seasonal average.
Commercial crude inventories remained close to the long-term average owing to the large-scale drawdown from the strategic reserve.
Commercial crude stocks were +7 million barrels (+1% or +0.12 standard deviations) above the prior ten-year seasonal average on May 5.
But inventories of gasoline were -12 million barrels (-5% or -0.98 standard deviations) below the seasonal average and the deficit had increased from -3 million (-1% or -0.31 standard deviations) in early March.
Gasoline stocks were the lowest for the time of year since 2014, according to weekly data from the U.S. Energy Information Administration.
Stocks of diesel and other distillate fuel oils showed an even larger deficit of -24 million barrels (-18% or -1.39 standard deviations) and this too had widened from -12 million (-9% or -0.73 standard deviations) in early March.
Chartbook: U.S. petroleum inventories
The continued depletion of fuel inventories has ensured futures prices for gasoline and diesel have risen faster than for crude since the start of May.
Crack spreads for gasoline are particularly strong ahead of the summer driving season while weaker diesel cracks are anticipating an economic slowdown.
But the overall picture is one in which fuel inventories are low, supporting prices despite the deteriorating economic outlook.
Most hedge funds and other portfolio investors are positioned to anticipate an economic slowdown that will enable inventories to be rebuilt.
Hedge funds and other money managers held a net long position of just 267 million barrels in Brent and WTI crude (6th percentile since 2013) on May 9.
Investors held a net short position of -22 million barrels (8th percentile) in middle distillates such as U.S. diesel and European gas oil.
But if economic growth and fuel consumption turn out to be faster than expected, inventories will continue to shrink rather than rebuild and the market could tighten quickly later in the year.
If this scenario materialises, and that is a big if, prices will rise rapidly to restrain consumption, and the increase will be accelerated as hedge funds and other investors close out bearish short positions and build bullish long ones.
Related columns:
- Funds bearish on oil even after price slide (May 15, 2023)
- Global petroleum stocks normalise after massive SPR drawdown (May 12, 2023)
John Kemp is a Reuters market analyst. The views expressed are his own
