Oil Jumps 6% Following Surge in US Fuel Consumption and April Inflation Decline

By Barani Krishnan

Oil prices surged by 6% on Wednesday, marking their first increase in three days and recovering two-thirds of the previous week’s losses. This shift came after a slight decrease in U.S. inflation for April suggested that the Federal Reserve may hold off on aggressive rate hikes that could lead the economy into recession.

Data indicating that U.S. crude inventories were nearly six times above expectations and at their highest level in four weeks did not deter oil bulls from making a significant comeback in the market. Instead, attention was drawn to last week’s substantial declines in gasoline and distillates, which are essential for producing diesel for transportation and jet fuel.

The New York-traded West Texas Intermediate (WTI), a benchmark for U.S. crude oil, increased by $5.95, or 6%, closing at $105.71 per barrel. WTI had previously dropped almost 9%, reaching a two-week low of $98.65 amid recession fears due to the Federal Reserve’s aggressive rate hike strategy aimed at combating inflation, which is rising at its fastest pace in 40 years.

Brent crude, the London-traded global benchmark, also rose, settling up $5.05, or 4.9%, at $107.51 per barrel. Similarly, Brent had fallen 9% before Wednesday’s rebound, touching a two-week low of $101.31.

John Kilduff, a partner at an energy hedge fund, remarked on the extraordinary volatility in crude prices, emphasizing the market’s dual pressures from recession fears and rising fuel demand as the summer approaches.

The latest consumer price index indicated an 8.3% rise in prices year-on-year as of April, a slight reduction from the 8.5% increase recorded in March. Despite easing inflation, it remains near four-decade highs, prompting questions about the trajectory of inflation moving forward.

Economist Adam Button noted the uncertainty regarding whether inflation will swiftly return to the target rate of 2% or settle into a prolonged decline. The Fed aims for this target and has indicated plans for seven rate hikes throughout the year, with ongoing discussions about the magnitude of each increase.

Additionally, crude prices received a boost from the latest oil inventory report. The Biden administration withdrew a record 7 million barrels from the U.S. Strategic Petroleum Reserve last week to mitigate supply shortages and address rising fuel prices. The SPR stockpile dropped to 543 million barrels from 550 million, marking its lowest level in 20 years.

The Energy Information Administration’s weekly update revealed that the administration has averaged a withdrawal of 3 million barrels per week from the SPR over the past two months to meet refiners’ demand. Global oil supplies are currently in a deficit of 5 to 7 million barrels per day, primarily due to Western sanctions on Russia, a major energy exporter, and an uptick in consumption as economies recover from the pandemic.

The administration began significant SPR withdrawals last November as demand surged. However, last week’s draw was more than double the usual trend as fuel prices soared, with gasoline averaging $4.37 per gallon compared to $2.99 a year ago.

From May through July, the administration has planned to release 180 million barrels from the SPR, averaging one million barrels a day. The recent report indicated a rise in commercial crude stocks by 8.5 million barrels, suggesting that the crude extracted from the reserve has likely filled commercial inventories.

Despite the crude draw, fuel consumption remained robust, with a notable drop in gasoline stockpiles falling short of forecasts and prior usage levels. Distillates continue to lead in inventory declines, resulting in record-high diesel prices.

Kilduff expressed concern that despite the administration’s efforts to use the SPR to combat fuel inflation, Americans are not seeing much relief at the pump. Despite a drop from March’s highs exceeding $130 per barrel, gasoline prices have stubbornly remained above $4 per gallon, leading President Biden to accuse energy companies of price-gouging.