As the summer driving season begins, the U.S. gasoline market is showing signs of weakness, casting a shadow over oil demand prospects ahead of the crucial OPEC+ policy meeting set for this weekend. This unexpected decline in demand complicates the outlook for global oil markets, already under strain from high inventory levels and fluctuating refining margins.
Decline in U.S. Gasoline Demand
Recent data from the U.S. Energy Information Administration (EIA) revealed a surprising 2% week-over-week drop in U.S. gasoline demand, which fell to 9.15 million barrels per day for the week ending May 24. This decline comes despite refiners operating at their highest capacity in nine months, leading to an unexpected increase in gasoline inventories. Consequently, gasoline futures prices hit a three-month low, and refining margins—a critical profitability measure for refineries—also fell to their lowest level in three months.
Impact on Oil Prices and Refining Margins
The decrease in refining margins is significant. Citi analysts noted that weaker margins could prompt refineries to cut back on their operations, potentially driving the entire oil complex lower. "Weak refined product markets could drive the entire complex lower, including for crude," they stated.
Broader Implications for Global Oil Demand
U.S. gasoline consumption accounts for about 10% of global oil demand. The recent rise in oil stocks due to subdued fuel demand supports the argument for OPEC+ to consider extending supply cuts at their upcoming meeting. Giovanni Staunovo, an analyst at UBS, highlighted that OPEC+ is closely monitoring all relevant data, including the latest developments in the U.S. gasoline market.
Factors Contributing to Weak Demand
Several factors contribute to the softness in U.S. gasoline demand. A significant number of travelers opted to fly over the holiday weekend rather than drive long distances, leading to a record number of 3 million people passing through airports on a single day, according to Staunovo. Additionally, the growing prevalence of fuel-efficient vehicles and electric cars has further reduced gasoline consumption. "Despite many on the road, the miles driven might have been lower than a year ago, and eventually, more efficient cars weighed on demand," Staunovo observed.
Market Structure Shift
On Friday, the market structure for U.S. gasoline futures briefly shifted to a 'contango,' where gasoline available for immediate delivery was priced lower than future deliveries. This inversion typically signals an oversupply in the market and can pressure current prices downward.
The unexpected weakness in U.S. gasoline demand is a critical factor influencing global oil markets as OPEC+ prepares to meet. With U.S. gasoline consumption playing a significant role in global oil demand, the latest data adds complexity to the already volatile market. As OPEC+ members evaluate their next moves, the interplay between supply, demand, and refining margins will be crucial in shaping the future of oil prices.
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Source: Reuters
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