By Barani Krishnan
Investing.com - So much for driving season demand.
Oil prices tumbled 4% on Thursday after the U.S. government's weekly dataset showed a smaller-than-expected crude drawdown as America's peak summer driving season got underway.
West Texas Intermediate futures, the benchmark for U.S. crude, settled down $2.22, or 3.8%, at $56.59 per barrel.
The August contract for U.K.-traded Brent futures, the global gauge for oil, was off $2.80, or 4.1%, at $65.07 a barrel by 2:50 PM ET (18:50 GMT). Brent hit a session bottom of $65, its lowest since the week ended March 3.
WTI is on track to finish May down about 11%, while Brent is showing a loss of more than 10% for the month. Both are still higher for the year, with the U.S. benchmark showing a 24% gain and its U.K. peer 21%.
The U.S. Energy Information Administration said in its regular weekly report that crude oil inventories decreased by just 0.28 million barrels in the week to May 24.
That was compared to forecasts for a stockpile draw of 0.86 million barrels after a build of 4.74 million barrels in the previous week.
Smaller-than-expected drawdowns of crude by refiners have weighed on oil prices lately. Oil bulls typically count on strong refinery runs and heavy gasoline consumption in the run-up to Memorial Day to keep prices high. But weak profit margins for producing gasoline -- averaging about 25% lower this year compared with 2018 -- have discouraged refiners from ramping up output.
While the latest EIA dataset showed refinery runs rising from the previous week's 89.9% of operable capacity to a seasonal norm above 91% last week, they weren't enough to produce the crude draws expected by the market.
"Refiners have finally stepped up their operating rate, and that may provide support to crude oil prices in the weeks ahead," said John Kilduff, founding partner at New York energy hedge fund Again Capital.
"Even so, it was notable that gasoline inventories were able to rise last week, in the face of a second-straight week of strong seasonal demand," Kilduff said.
Gasoline inventories increased by 2.2 million barrels, compared to expectations for a drop of 0.53 million barrels, the EIA said.
That aside, U.S. crude production returned to record highs of 12.3 million barrels per day, offsetting the impact of ongoing OPEC production cuts.
Crude exports also rose by 400,000 barrels to 3.3 million bpd, reflecting the ability of U.S. oil shippers to grow market share as rival major producers Saudi Arabia and Russia continue cutting output to try and shore up prices.
The only bullish number in the EIA dataset was that for distillate stockpiles, which include heating oil, diesel, jet fuel and other transportation fuels. These fell by 1.62 million barrels, compared to forecasts for a build of 0.56 million.
Escalating trade tensions between the U.S. and China have dented the oil rally amid fears that the conflict between the world’s two largest economies could derail global growth and energy demand.
Ellen Wald, president of energy and geopolitics firm Transversal Consulting and an Investing.com contributor, noted that 2019 has been good to oil traders as prices have increased steadily since the beginning of the year.
“However, the pendulum of good news/bad news may finally be swinging more heavily to the negative side, as signs of global economic slowdown get stronger,” Wald warned.
Contrasting the slowdown in demand, supply has been tightening thanks to OPEC-led production cuts, U.S. sanctions on Iran and Venezuela and disruptions from Nigeria to Russia.
Faced with the tightening supply, Wald postulates that the “conflicting signals mean the surprises may very well continue”.