U.S. oil prices settle with a more than 3% loss as weak gasoline demand allows fuel inventories to rise

Price action

• West Texas Intermediate crude for September delivery
  CL.1,
  -3.53%

  CL00,
  -3.53%

  CLU22,
  -3.53%
  fell $3.53, or 3.5%, to settle at $96.35 a barrel on the New York Mercantile Exchange. That was the lowest front-month contract finish since July 14, according to Dow Jones Market Data.

• September Brent crude
  BRN00,
  

  BRNU22,
  ,
  the global benchmark, dropped $3.06, or 2.9%, to $103.86 a barrel on ICE Futures Europe, the lowest since July 15.

• Back on Nymex, August gasoline
  RBQ22,
  -3.92%
  dropped 3.8% to $3.1495 a gallon, while August heating oil
  HOQ22,
  -0.77%
  shed 0.4% to $3.5903 a gallon.

• August natural gas
  NGQ22,
  -1.55%
  edged down by 0.9% to $7.932 per million British thermal units. That followed following a more than 10% rise on Wednesday, when prices settled above $8, at their highest since June 13.

Market drivers

Crude and product futures added to declines that followed data from the Energy Information Administration showing U.S. gasoline inventories unexpectedly rose 3.5 million barrels last week versus forecasts for a rise of 400,000 barrels. Moreover, the rise came despite a cut in refinery runs to 93.7% last week from 94.9% a week earlier.

That’s seen as a particularly negative development in the middle of what’s known as summer driving season in the U.S., which runs from the Memorial Day holiday in late May to the Labor Day holiday in early September.

“Additionally, gasoline supplied, a measure of implied demand, only bounced by 459,000 b/d (barrels a day) to 8.52 million b/d last week after the measure plunged 1.35 million b/d the prior week, which was the largest since the initial COVID lockdowns,” wrote analysts at Sevens Report Research. These data points “continue to suggest high prices are resulting in demand destruction among consumers as inflation continues to pressure personal balance sheets.”

Read: Why are gas prices going down? Drivers begin to see some relief at the pump

Meanwhile, Libya’s National Oil Corporation said Wednesday that preparations were under way to export crude oil after the lifting of force majeure on terminals and oil fields.

Overall, “oil traders have watched a plethora of negative factors: rising supplies from Libya and Russia, amidst continued lockdowns in China and potentially declining U.S. demand,” Manish Raj, chief financial officer at Velandera Energy Partners, told MarketWatch.

“Conservative oil investors have watched this movie before in 2008, when staggering oil prices dampened oil demand and led to a crash in oil prices,” he said. “It is easier for traders to stay on the sidelines until the demand picture is clearer. “

Still, “all is not lost since there is a tussle between an incredibly tight physical market and a loose outlook from speculative traders,” said Raj. “History has shown that physical markets always win over speculative traders since that the only place oil changes hand.”

Natural gas taps a 5-week high, then ends lower

Natural gas flows through a major pipeline from Russia to Europe resumed on Thursday after a 10-day shutdown for maintenance, the operator said. Uncertainty around whether Russia will maintain flows as Western European countries worry about gas shortages this coming winter remain, however. The European Commission on Wednesday proposed that member states cut their gas use by 15% in coming months to avoid disrupting key industries in the winter.

Risk consulting firm Eurasia Group’s base case scenario sees a 60% probability of continued gas supply cuts to the EU by Russia, with a 30% chance of much deeper cuts, and only a 10% likelihood of a restoration to normal supply levels.

“Even if Nord Stream 1 returns to normal levels, Moscow may cut supply elsewhere, possibly through the pipelines transiting Ukraine. This strategy is probably aimed at inflicting economic damage on Europe in retaliation for its sanctions while still generating revenue for Moscow. As a result, Russia’s ongoing partial cuts probably mean its overall 2022 gas flows to the EU will be around 90 bcm (billion cubic meters), compared with 155 bcm supplied in 2021,” said Henning Gloystein, director of energy, climate and resources at Eurasia Group, in a note.

U.S. prices for natural gas, meanwhile, briefly topped $8 per million Btus after the Energy Information Administration on Thursday reported a smaller-than-expected increase of 32 billion cubic feet in domestic supplies for the week ended July 15.