Oil's cushion is thinner before the Fed speaks
This morning's EIA report put a fresh supply warning in front of the Federal Reserve. U.S. commercial crude inventories fell 7.2 million barrels in the week ended July 24, reversing the prior week's 2.0 million-barrel increase.
Crude stocks fell to 404.5 million barrels, about 7% below the five-year average for this time of year. That is a smaller buffer heading into the Fed's 2:00 PM ET policy decision, with the federal-funds target now at 3.50% to 3.75%.
The Fed's June meeting minutes said a Middle East truce had pushed the oil curve and near-term inflation expectations lower. The new inventory data do not prove another oil shock is coming. They do show that domestic supplies are less able to absorb one than they were a week ago.
Fed staff estimated May total PCE inflation, the Fed's broad preferred measure, at 4.1%. Core PCE inflation, which excludes food and energy, was estimated at 3.4%.
The draw has more than one cause
A weekly crude draw can reflect strong demand, weaker imports, heavy refinery activity, or some mix of all three. This report points to a mix.
U.S. refineries processed an average of 17.3 million barrels of crude a day in the latest week, up 271,000 barrels a day from the prior week. They operated at 97.2% of capacity. That is a high run rate, and it pulls crude out of storage to make gasoline, diesel, and jet fuel. Imports were also lower. The four-week average of U.S. crude imports was 5.7 million barrels a day, down 6.9% from a year earlier. Lower imports can reduce domestic stocks even if end demand is not accelerating. This is why the report should not be treated as proof of a new demand boom. High refinery runs and lower imports can produce a sharp crude draw without a sudden jump in fuel use.
The broader balance tightened too. Total commercial petroleum inventories fell 3.7 million barrels in the latest week, so the crude decline was not fully offset by a build elsewhere in the system.
Fuel stocks keep the inflation risk alive
Finished fuel inventories are also below normal levels. Motor gasoline stocks rose slightly in the latest week, but remained 6% below their five-year average. Distillate inventories increased 1.1 million barrels, yet stayed 9% below their five-year average.
Distillates include diesel and heating oil. A short distillate cushion can matter beyond the gas pump because diesel costs feed into freight, industrial activity, and delivered goods prices.
Jet fuel demand adds another sign of pressure. Product supplied, a measure of fuel moving into the market, was 5.8% higher for jet fuel over the past four weeks than a year earlier.
The FOMC's policy statement, scheduled for 2:00 PM ET, is the next test. Language that treats the supply strain as temporary would show that policymakers still see the oil shock as contained. Language that puts greater weight on inflation risk would signal that the current policy range may remain in place longer than investors had hoped.
