Then There Is That Demand Thing
Oil prices got clobbered on fears of an economic slowdown and a promise by Saudi Arabia to raise production but then there is that demand thing. You remember demand. It is the other side of the market, you know supply and then demand. Well, if you try to look at that side of the equation the economy is smoking. In fact, instead of a slowdown in the global economy in terms of energy demand, we are seeing the strongest demand we have seen at this time of year in over a decade. The Energy Information Administration (EIA) reported, in its “Weekly Petroleum Status” report, that demand for all petroleum products averaged 20.4 million barrels, up 3.6% from the same period last year and at the highest levels since 2006. The main source of that demand was driven by distillate fuel demand that averaged 4.1 million barrels per day, that was up 7% from last year. Gasoline demand was up week over week but over the past four weeks, averaged 9.2 million barrels per day, down by 1.3% from the same period last year. Gas demand was hampered over the last four weeks by Hurricane Michael, but overall with demand this strong at a time when it is usually soft makes the supply side that much tighter.
While the EIA did report that crude supply increased by an impressive 6.3 million barrels from the previous week, it was enhanced by a 1.2 million-barrel release from the Strategic Petroleum Reserve but it only leaves overall supply just 2% above the five-year average while demand for oil products is running much higher than that. That is not very comforting as we get closer to winter. That demand surge led to big drops in products. The EIA showed that motor gasoline inventories decreased by 4.8 million barrels last week, but still about 6% above the five-year average for this time of year.
Yet, on the distillate side is where we are still having the problem. The EIA reported that distillate fuel inventories fell by 2.3 million barrels last week leaving them about 4% below the five-year average. So, if the stock market is not right about a demand slowdown in the global economy, we are going to see an extremely tight market all winter and the possibility of price spikes and potential short falls somewhere in the globe.
Yet, for now that does not matter. The market is taking seriously the Saudi pledge to raise output and the open invitation to all oil producers to produce as much oil as they can. The Market is looking at the turmoil in global stock markets as evidence of a demand slowdown and is ignoring the bullish demand data that we have in front of our face in favor of the fear of what may happen tomorrow.
Still, is fear a good investment strategy? Well maybe sometimes. I fear that the market is too complacent about this tight market place. Refiners are not going to remain quiet forever. In fact, according to the EIA they are already starting the long trek out of refinery maintenance. The EIA reported that they upped their runs to 89.2% of their operable capacity last week. Gasoline production decreased last week, averaging 10.0 million barrels per day. Distillate fuel production increased last week, averaging 5.0 million barrels per day and there is still plenty of work to do.
The oil market is also hoping that the call for the removal of quotas on OPEC oil producers will bring us a flood of oil, but I am afraid that they may be a bit disappointed. Iranian sanction starts November 4th and already there are concerns about how that oil is going to be replaced. The Saudis have produced 12 million barrels a day but that barely replaces Iran’s oil and leaves no coverage for declines from other producers. Other OPEC producers could see output struggles to maintain current levels.
That means higher prices for consumers. The Energy Information Administration reported, in their “Winter Fuels Outlook”, that the average U.S. household expenditures for most major home heating fuels will be higher this winter compared with last winter. Average increases vary by fuel; natural gas expenditures are forecast to rise by 5%, home heating oil by 20%, and electricity by 3%, while propane expenditures are forecast to remain similar to last year. Most of the increase reflects higher forecast energy prices. U.S. average heating degree days are expected to be 1% higher than last winter. However, realized expenditures are highly dependent on actual weather outcomes.
The EIA expects natural gas inventories to end October at the lowest levels for that time of year since 2005. Inventories of distillate fuel and propane are also below the five-year (2013–17) average in several regions. Although inventory levels are low, EIA expects fuel supplies to be adequate to meet winter demand. I guess that’s assuming we don’t go into a polar vortex winter.