Oil prices dropped significantly for the second day on Thursday, following a report from the U.S. government that revealed weak fuel demand and a surprising increase in gasoline and distillate fuel stockpiles.

This unexpected development has led to concerns about the state of the U.S. fuel market and its impact on global oil prices.

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• Despite lower crude inventories, the U.S. reports a surprise build in gasoline and distillate fuel stockpiles.

• Gasoline demand falls 2% week-on-week, defying expectations of a Memorial Day boost.

• Oil prices slide as weak fuel demand and rising inventories overshadow refinery output gains.

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Oil Prices Drop as US Reports Unexpected Fuel Build and Weak Demand

Brent and WTI Crude Futures Fall

Brent crude futures, the global benchmark, fell by $1.74 or 2.1% to settle at $81.86 a barrel. Similarly, U.S. West Texas Intermediate (WTI) crude futures dropped by $1.32 or 1.7% to $77.91 a barrel. 

The decline in oil prices can be attributed to the latest U.S. Energy Information Administration (EIA) data.

U.S. Crude Stocks and Refinery Utilization

The EIA report showed that U.S. crude stocks decreased more than anticipated last week as refiners increased their utilization rates to the highest level in over nine months. 

This indicates that refineries are processing more crude oil to meet demand. 

However, despite the rise in output, the report also revealed a surprising jump in gasoline and distillate fuel inventories.

Weak Gasoline Demand Drags Oil Complex

Alex Hodes, an oil analyst at StoneX brokerage, noted that weakness in the gasoline markets has continued to affect the rest of the oil complex. 

This observation highlights the significant impact of gasoline demand on the overall oil market.

Memorial Day Holiday Fails to Boost Demand

Analysts had anticipated that the May 27 U.S. Memorial Day holiday, which marks the beginning of the summer driving season, would increase fuel demand. 

However, the EIA’s measure of gasoline demand showed a 2% decrease from the previous week, settling at 9.15 million barrels per day. 

This unexpected drop in demand has surprised market participants.

Gasoline and Diesel Futures Tumble

Due to weak demand and increasing inventories, U.S. gasoline futures fell by more than 2% to a three-month low of $2.40 a gallon. 

Similarly, ultra-low sulfur diesel futures settled at an 11-month low. 

These price drops indicate a bearish sentiment in the fuel markets.

Investor Sentiment and OPEC+ Meeting

In addition to the fuel market dynamics, investors’ risk appetite has been subdued by the prospect of delayed monetary easing in the U.S. and Europe, according to analysts at financial brokerage ActivTrades. 

They noted that “fear trading” is dominating financial markets ahead of Friday’s U.S. consumer price index data release.

Furthermore, oil investors are cautious about the upcoming OPEC+ meeting this weekend. 

The producer group, which includes the Organization of the Petroleum Exporting Countries (OPEC) and allies like Russia, will decide whether to extend, deepen, or unwind supply cuts. 

The soft fuel demand and rising global oil inventories may influence OPEC+ producers to maintain supply cuts when they meet on June 2.

The unexpected build in U.S. fuel inventories and weak demand have put significant pressure on oil prices, leading to a two-day decline. 

The surprising drop in gasoline demand despite the Memorial Day holiday has raised concerns about the state of the U.S. fuel market. 

As investors remain cautious and await the OPEC+ meeting, the future direction of oil prices will depend on the balance between supply and demand factors and global economic developments.

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