Oil Jumps 6% After Surge in U.S. Fuel Consumption, Inflation Ticked Down in April

Oil prices increased by 6 percent on Wednesday, rising for the first time in three days and erasing two-thirds of the week's losses, after a drop in U.S. inflation for April suggested the Federal Reserve may not go overboard with rate hikes that could trigger an economic recession in the near future.

The fact that weekly U.S. crude stocks were roughly six times higher than anticipated and at their highest level in four weeks did not deter oil bulls from making a forceful return to the market.

Instead, the attention was on last week's massive gasoline drawdowns, as well as the distillates used to produce diesel for trucks, buses, trains, and ships, as well as jet fuel.

West Texas Intermediate, or WTI, the benchmark for U.S. petroleum traded in New York, rose $5.95, or 6 percent, to $105.71 per barrel.

WTI had dropped over 9 percent earlier in the week, reaching a two-week low of $98.65 on concerns that the United States could enter a recession as a result of aggressive rate hikes by a Fed determined to combat inflation rising at its fastest rate in four decades.

Brent crude, the global oil benchmark traded in London, closed up $5.05, or 4.9%, at $107.51 per barrel.

Prior to Wednesday's bounce, Brent had plunged 9 percent on the week, reaching a two-week low of $101.31.

John Kilduff, a partner at the New York-based energy hedge fund Again Capital, remarked, "The volatility in crude oil prices is astounding, as the market is being tugged in opposite ways by worries of a U.S. recession and optimism about the anticipated demand for gasoline ahead of the summer."

The Labor Department reported earlier on Wednesday that U.S. consumer prices grew 8.3 percent year-over-year in April, slowing somewhat from the 8.5% annual growth in March while keeping inflation close to four-decade highs reached since late last year.

"We are in the midst of transitioning from exceptionally high year-over-year inflation, but the shape of that curve is uncertain," economist Adam Button wrote on the ForexLive platform. "Will it be a rapid return to 2% inflation, or a lengthy and arduous process?"

The possibility of inflation returning to 2 percent is one of the Fed's primary concerns. The central bank has projected seven rate hikes for this year — the maximum allowed under its 2022 monthly meeting schedule — and more rate adjustments for next year to reach the 2 percent target.

The Fed's monthly rate-hike projections are more puzzling to investors than anyștiinștiin Officials at the central bank are currently debating the sustainability of a 75-basis point increase in June, following increases of 50 and 25 basis points in May and March, respectively. A 75 basis point increase would be the greatest rate increase since 1994.

In addition to the benign April consumer price report, crude prices were also supported by the Energy Information Administration or EIA's monthly oil inventory report.

Last week, the Biden administration drew a record 7 million barrels of crude oil from the U.S. Strategic Petroleum Reserve, or SPR, in an effort to bridge a supply gap and reduce record-high gasoline prices.

According to the EIA's Weekly Petroleum Status Report, the SPR's stockpile for the week ending May 6 decreased to 543 million barrels from the previous 550 million, which was already the lowest level in 20 years.

Each Wednesday, the Energy Information Administration (EIA) releases a report indicating that the Biden administration has pulled an average of 3 million barrels per week from the Strategic Petroleum Reserve (SPR) during the past two months to assist meet domestic refiners' demand for crude.

As a result of Western sanctions against Russia — one of the world's top energy producers — it is predicted that global oil supplies fall short of demand by five to seven million barrels per day. A surplus in fuel consumption accompanied by a robust economic recovery after the two-year coronavirus pandemic has contributed to a market deficit.

In November, when oil supplies began to tighten due to rising demand, the Biden administration initiated its first significant SPR removal.

However, last week's SPR draw was more than double the weekly average as the administration entered an era of increased reliance on the reserve, with average pump prices of gasoline reaching all-time highs of $4.37 per gallon compared to $2.80 per gallon a year ago.

For the months of May through July, the administration has scheduled the release of 180 million barrels of SPR, or approximately one million barrels per day for 180 days.

The EIA report revealed that as SPR inventories decreased by 7 million barrels last week, commercial crude inventories increased by 8.5 million barrels. It may appear to the casual observer that the crude exiting the reserve went directly into commercial stockpiles. According to the EIA, there is a one-week accounting gap between the two.

Despite the crude draw, consumption of fuel products remained robust last week, with gasoline inventories falling by 3.61 million barrels, compared to the expected draw of 1.6 million barrels and the prior week's consumption of 2.23 million barrels. Gasoline, sometimes known as petrol outside of the United States, is the most popular automobile fuel product in the United States.

The consumption of 2.34 million barrels of distillates during the previous week resulted in a decrease of 913,000 barrels of distillates inventories last week.

Distillates have been the fastest-growing component of the U.S. oil complex for several months, with inventory levels falling almost continuously since early January. As a result, diesel prices have reached record highs, averaging $5.55 a gallon compared to $3.13 per gallon a year ago.

"The Biden administration is committed to use the SPR to its fullest extent to combat fuel inflation. The reality is that Americans are not experiencing much of a reduction in their gas prices, according to Kilduff of Again Capital.

The retail price of gasoline has been at or above $4 per gallon for the past two months, prompting President Joe Biden to accuse energy companies of price gouging at the pump.