All good things come to an end and so it was with the weekly streak of US crude oil inventory draws. Yesterday’s EIA stock report revealed that US crude stocks unexpectedly rose by 2.1 million bbls in the week to July 16, ending a run of eight straight weekly declines. Spearheading this increase was a double whammy of surging imports and plunging exports. US crude imports rose by 876,000 bpd w-o-w to 7.1 million bbls, the highest since July 2020. At the same time, US crude shipments dropped by 1.56 mbpd to a 10-week low of 2.46 mbpd. Nevertheless, despite the uptick in US crude stocks, they are still well below the 5-year average. In other words, the crude glut alarm bells are far from being sounded.

Alongside the crude build, products inventories drifted lower. US gasoline stocks fell by a smaller-than-expected 121,000 bbls while distillate fuels stockpiles posted a surprise drop of 1.3 million bbls. Meanwhile, the demand front was constructive. US fuel consumption rose back above 20 mbpd and is on par with the same period in 2019. Even so, despite these positive nuggets, it was on balance a bearish report. However, this fact was lost on the market as oil prices rallied hard. Brent and WTI leapt higher, rallying by around $3/bbl to settle back above the psychologically significant $70/bbl level. Market players shook off some of their worries that the pandemic will hit oil demand and put their faith in tightening oil fundamentals.

Despite yesterday’s impressive display of bouncebackability, virus concerns have by no means completely disappeared. The situation with the more contagious Delta strain of the Covid-19 virus is getting worse, especially in Asia where several nations are reporting record infections. It, therefore, remains a key risk to watch and should ensure continued heightened price volatility. Oil is still to a certain extent at the mercy of the fast-spreading Delta variant.

A false start

US gasoline demand has regained its footing. Vaccinations, the summer driving season and easing economic restrictions have contributed to greater demand for gasoline. Indeed, recent federal data shows that gasoline demand has returned to pre-pandemic levels — and beyond. The week running up to the Independence Day holiday saw weekly gasoline supplied hit a fresh record, according to EIA data. Gasoline supplied, a proxy for demand, rose to a record 10.04 mbpd for the week ending July 2, the highest in data going back to 1990.

Gasoline consumption is showing promise as demand for other fuels, most notably kerosene, continues to underwhelm. Yet despite appearing to shift into top gear, the question now is whether this positive momentum will be maintained. Should market observers get excited about one week of record demand for gasoline? Subsequent data has cut through this optimism.

Implied US gasoline demand fell sharply in the following week. EIA data showed nationwide gasoline consumption plunged from a high of more than 10 mbpd to 9.28 mbpd in the week to July 9. Figures for the following week were eagerly awaited to understand if this pullback was an aberration or if demand in the US is reaching a heightened state. And sure enough, yesterday’s EIA data release showed gasoline consumption was barely changed in the week to July 16 at 9.29 mbpd. This suggests that US gasoline demand is levelling off.

After hitting a record high, implied US gasoline demand has failed to meet bullish expectations. Even so, refiners are still running at full bore. Summer is the time of the year when refiners chase profits regardless of what supply and demand numbers tell them. Refinery inputs are holding above 16 mbpd and domestic gasoline production is hovering around 10 mbpd. Yet this surge in supply risks eclipsing demand, which in turn could pave the way for stock builds. Up until now, gasoline stocks have tightened. Inventories are in line with the 5-year average but are vulnerable to swelling over the coming weeks.

This is especially true when you consider that gasoline prices are expected to keep climbing through August.  Prices at the pumps are already at their highest in seven years. Gas prices topped $3.15 a gallon this week which is almost a dollar higher than a year ago and are poised to keep rising. With no relief in sight at the pumps, despite the OPEC+ agreement to boost supply, near-term US gasoline consumption could come under pressure.

Gasoline bulls have proudly touted record demand in the US. But a subsequent pullback suggests that it is still nursing a Covid hangover. To be sure, the four-week rolling average for gasoline, seen by many as a more reliable gauge, currently stands at 9.45 mbpd. This compares unfavourably to 9.53 mbpd over the same period in 2019. Moreover, in a further blow to the US gasoline complex, the EIA recently trimmed its 2H21 demand forecast to 8.93 mbpd from a previous estimate of 8.96 mbpd. The message is clear: US gasoline consumption in 2021 has likely past its peak.