(Bloomberg) -- Oil closed higher after traders assessed a U.S. government report showing the largest two-week decline in gasoline supplies on record, while signs emerged of demand picking up.
Futures in New York rose 0.7% on Wednesday after earlier flipping between modest gains and losses. Domestic gasoline supplies slid last week to the lowest in about four months, while demand rose to the highest since November, according to Energy Information Administration data. Further price gains were tempered by a 13.8-million-barrel increase in crude inventories, with shale drillers boosting output following an unprecedented cold blast in the U.S. South.
“Because of the freeze in Texas, people were expecting a big product draw from refinery shutdowns and a crude build because crude wells have come back online a lot faster,” said Michael Lynch, president of Strategic Energy & Economic Research. “A steady increase in miles driven and gasoline demand will give people a sense that normalcy is around the corner.”
While crude prices are up more than 30% this year, questions remain over at what point oil’s rally will tempt more producers to loosen the taps. Russian Deputy Prime Minister Alexander Novak said he sees a risk of non-OPEC+ countries boosting output amid higher prices. Meanwhile, oil production across American shale patches next year is expected to climb as producers take advantage of the rebound, according to a separate government report on Tuesday.
“The group of producers may have seen a window of opportunity to binge on higher prices with non-conventional producers unable to capture market share in the near-term,” TD Securities commodity strategists including Bart Melek said in a note. But OPEC+ may “have sufficiently overtightened the market, such that new shale production could again be profitable.”
The refining margin for gasoline continued its rally above $20 a barrel and is at the highest for this time of year since 2015, and crude processing rose by a record 2.4 million barrels a day. Tighter fuel inventories left in the wake of the country’s February polar blast comes ahead of a summer driving season that could see a release of demand built up during the pandemic.
“Between summer driving season and as lockdowns are lifted, gasoline demand is going to increase by a fair amount,” said Brian Kessens, a portfolio manager at Tortoise, a firm that manages roughly $8 billion in energy-related assets. “As it relates to refining margins, they should be pretty strong over the next several months, giving a real incentive to produce a lot more gasoline.”
There are already signs that oil demand is recovering. Congestion in New York is also clawing back, with this month set to mark the fastest increase in toll route traffic since November 2019. The rolling average for gasoline supplied, a proxy for consumption, rose above 8 million barrels a day last week for the first time since November, the EIA report showed.
However, fuel demand is facing an uneven recovery around the world. In Europe, processing levels are lagging well behind those of rivals in Asia and North America in a sign consumption there is still being hit hard by the pandemic. The continent’s refinery throughputs will be 15%-20% lower this quarter than they were in the pre-pandemic world of 2019, a bigger deficit than both North America and Asia, according to Wood Mackenzie Ltd.
©2021 Bloomberg L.P.
