Rising fuel inventories hit crack spreads, likely signaling refining slowdown ahead

Oil futures posted solid weekly gains that have more than recouped the big drop that followed OPEC's June 2 announcement of its plan to begin phasing in the return of ~2.2M bbl/day of crude later this year.

The week was marked by conflicting demand projections, as OPEC stuck to a forecast for relatively strong oil demand growth of 2.2M bbl/day, and the U.S. Energy Information Administration slightly raised its demand growth estimate for 2024, while the International Energy Agency cut its demand growth forecast to less than 1M bbl/day and predicted global oil demand will reach a peak by the end of this decade.

But all three groups predicted a supply deficit at least until the beginning of winter, Commerzbank analysts noted.

Front-month Nymex crude oil (CL1:COM) for July delivery settled +3.9% at $78.45/bbl, and front-month Brent (CO1:COM) ended the week +3.8% at $82.62/bbl; both edged 0.2% lower on Friday.

Front-month July Nymex natural gas (NG1:COM) closed the week -1.3% to $2.881/MMBtu, including a 2.6% drop Friday.

ETFs: (NYSEARCA:USO), (BNO), (UCO), (SCO), (USL), (DBO), (DRIP), (GUSH), (NRGU), (USOI), (UNG), (BOIL), (KOLD), (UNL), (FCG), (CRAK)

U.S. oil refineries have been processing petroleum at the fastest rate for the time of year since before the COVID pandemic, the EIA reported this week, but rising fuel inventories have begun to hit refining margins.

Refineries processed 17.5M bbl/day of crude and other feedstocks in the week ended June 7, the fastest seasonal rate since 2018, and employed 95% of their operable capacity, the highest percentage since 2019, according to the EIA's weekly data.

Gasoline inventories came in at 1M barrels above the previous 10-year seasonal average, vs. a deficit of 6M barrels two months ago.

As a result, the 3-2-1 crack spread has averaged $24/bbl so far in June, down from $31/bbl in March, but in line with the average for the 10 years before the pandemic, indicating the fuel market is comfortably supplied.

Refineries have been responding to relatively high refining margins but the rising inventories likely foreshadows a slowdown in processing in the weeks ahead.

The top six U.S. refiners by processing capacity, according to the EIA: Marathon Petroleum (MPC), Valero Energy (VLO), Exxon Mobil (XOM), Phillips 66 (PSX), PBF Energy (PBF), Chevron (CVX).

The energy sector, as indicated by the Energy Select Sector SPDR ETF (XLE), was the week's worst performer, -2.2%.

Top 5 gainers in energy and natural resources in the past 5 days: Nano Nuclear Energy (NNE) +38.8%, Texas Pacific Land Trust (TPL) +28.8%, Flux Power (FLUX) +18.9%, Ivanhoe Electric (IE) +17.4%, Enovix (ENVX) +16.4%.

Top 10 gainers in energy and natural resources in the past 5 days: Atlas Lithium (ATLX) -25.2%, Contango Ore (CTGO) -21.1%, Battalion Oil (BATL) -20%, BW LPG (BWLP) -18.9%, Arcadium Lithium (ALTM) -16.4%, Compass Minerals (CMP) -14%, NextEra Energy Partners (NEP) -13.7%, Gold Fields (GFI) -12.8%, Solaris Resources (SLSR) -12.5%, ProFrac Holding (ACDC) -12%.

Source: Barchart.com