Why is demand suddenly faltering?
By Nick Cunningham, Oilprice.com:
Oil prices are stuck in a holding pattern, waiting for more definitive data on what comes next. OPEC compliance is helping keep prices afloat, but rising U.S. oil production is acting as a counterweight.
A new problem that has emerged is the record levels of gasoline sitting in storage. The market has already had to digest the fact that U.S. crude oil stocks were rising, and investors have done their best to explain away the trend. But now gasoline inventories are climbing to unexpected heights.
It would be one thing if crude stocks were rising, perhaps because refiners were going offline for maintenance. But if that were the case, then gasoline stocks would draw down on lower refining runs. But if both crude and refined product inventories are going up at the same time, then there should be some reasons for worry.
In fact, the glut of gasoline is now the worst in 27 years. At 259 million barrels, U.S. gasoline storage levels are now at their highest level since the EIA began tracking the data back in 1990.
Part of the reason for the glut, of course, are high levels of production. Although gasoline production ebbs and flows seasonally, U.S. production has been on an upward trend in recent years.
Instead of bouncing around in a range of 8.5 to 9.5 million barrels per day before 2014, U.S. production since the collapse of oil prices has steadily climbed to a range of 9 to 10 mb/d.
But that increase came in order to satisfy rising demand (which, of course, was stoked by lower prices). More demand should have soaked up that excess supply. However, that is where the problem gets worse. Lately, U.S. demand has faltered.
U.S. gasoline demand plunged to just 8.2 million barrels per day in January, and sales were down 4 percent from a year earlier. It was also the lowest level in four years. Weak demand is raising some red flags for the market.
Demand is seasonal, with softer demand in winter months, but this winter’s ‘valley’ is lower than any other since 2012.
The problem becomes particularly acute when you take into account the fact that refiners have actually cut back on gasoline production in recent weeks. Even with lower refining runs, gasoline storage levels continued to rise.
The data is worrying, especially since broader economic data does not point to deep problems with the U.S. economy. Some, including the EIA, speculate that higher prices are cutting into demand. That would be surprising given that prices at the pump are still a fraction of what they were a few years ago.
The drop off in demand could be temporary, with consumption rebounding in a few months. Warmer temperatures tend to lead to more driving, and if demand rises it will halt the climb in gasoline inventories. But even a small hiatus in demand has led to a buildup in storage levels to such a degree that it will take time to bring down. “It kind of ruins your whole year potentially,” Sam Margolin, an analyst at Cowen, told the WSJ. “Demand growth appears to be the riskiest element of the oil equation in 2017, and the rally could pause until driving season.”
The glut of gasoline has led to tankers being turned away at New York Harbor in recent weeks, diverted to ports in the Caribbean. However, even that did not resolve the glut on the U.S. east coast. “Record-high inventories in the region are now pushing prices low enough to turn the typical trade flow on its head,” Bloomberg reports. The east coast typically imports a lot of crude oil and refined products. But refined products are instead heading in the other direction because of the buildup in supply.
If demand does not rebound, then gasoline inventories will rise further. At that point, refiners will be forced to cut back on production, which means a reduction of their purchases of crude oil. Less oil sales means higher crude oil inventories, pushing down prices. Ultimately, that could force drillers to reduce supply. In short, if U.S. demand – and by extension, global demand – does not come through for the oil market, then oil prices could decline this year. By Nick Cunningham, Oilprice.com
Being long oil is a very “crowded trade,” but who’s on the other side of that trade, and what do they know that speculators don’t? Read… Why a NYMEX Veteran is Getting Nervous about Oil
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Demand is down because we don’t have to travel to 5 different stores looking for a particular something when we can find exactly what we want, at the best price, online.
TheDona, If you and I represent a large number of people, then I believe Amazon.com’s sales increases will be found to highly correlate with decreased vehicle fuel usage.
It certainly has in my case.
RD: I agree wholeheartedly. Nearly half of US households have membership to Amazon prime.
My Millennial daughters, my elderly parents, my siblings…so 3 generations, order almost everything online. Start checking out Walmart online ordering (unusual items not in stores) – free 2 day shipping to your home and we are seeing cheaper prices than Amazon. They upped the game against Amazon by purchasing Jet.com.
Great for consumers….bad for oil/gasoline suppliers and for brick and mortar sales. Interesting times. Now if only I could sell all of these boxes. LOL
Agree about WalMart. I use them the same way.
Boxes are only a minor problem, here in the country (lots of things are!). They get “treated’ along with brush piles.
Not trying to rain on your Parade…However,taking just 40% of the roughly 126 million Families in the US…and using the 10.99 monthly charge for Prime…gives Amazon well Over 6 BILLION a Year Prime Income,if I did my math correctly..? lolol Good work if you can get it…
@Nik
Your math is correct.
In 2016, Amazon Prime memberships added about $6 billion in revenues. That’s only a fraction of the roughly $100 billion they did in retail sales.
Aloha Friends…Why would some of this come as a surprise….? 1) More Fuel EFFICIENT-Engines 2) More Partially or Fully ELECTRIC Cars 3) Bogus Economic Forecasts and Statistics,with Erroneous Business Projections thrown in for good measure…then understand the fact that….Today the Basic Consumer has far less money to Spend,period. thanks for reading,aloha
Regarding more fuel efficient cars: coming down the pike is higher percentage blend of NON efficient biofuels to cut down your gas mileage so you have to buy more gas and pony up taxes for more ethanol subsidies which the production of is an energy suck. Everything these days appears to be a lose-lose spiral downwards.
Plus the Bedouins know they are in their last hurrah and are going to sell oil like crazy due to FOMO.
Exactly, Nik! People are earning less; they are deeply in debt; taxes keep rising; inflation means everything costs more every year; and politicians wonder why spending has decreased.
They really ought to impose an intelligence test on candidates for office. A five-year-old could figure that one out.
Tom Welsh says politicians don’t have the brains of a five year old, as if he is unaware that policians lie. The politians know better than we do what the long-term goal for the paurperization of the US is.
Being labelled an idiot is preferable to being called out as a criminal. The politicans know they are lying, they just hope the public doesn’t catch on until it’s too late.
I’m always surprised when I hear people not understanding that the politicians and newspaper editors are not idiots – they just assume we are.
vehicle sales have been heavily tilted to trucks the past couple of years, and electrics are still an inconsequential share of all vehicles.
You have to look at this along with delinquencies rising, etc. Perhaps repo effect is taking cars off road? That, plus the rise in gas from the low, which, while still far below highs, is a sharp increase in cost, means less non-essential driving at the margin.
Also, credit card debt burdens rising.
Think of the various pressures on the budget. More people signed up for ACA, which means they are now diverting $ to health care premiums.
What else? Think think think…
Food prices are down, so that is a plus, but restaurant prices are rising far faster than inflation overall.
Student debt rates – are some of those variable? I know most car loans are not , but the surge in car sales means installment payments eat up more income.
Fees for everything are rising like mad. It’s part of the general cost of private equity buyouts of public services. Crapification at a higher cost, but the money funneled to businesses instead of government revenues. Just ask Chicago how that is working out.
Dont even think about how much education costs. The hidden fees there make the reality even worse than the horrifying published cost figures.
The list just goes on. I dont think there are too many dumflocks with variable rate mortgages at this point, but the recent trend since summer is definitely not helping those folks. Nor are property tax increases most likely.
Credit card debt burdens are about the same as they were in 2008. Yes, they’re rising but the bigger debt burdens are now car and education loans.
What is the point of the Dakota Access Pipeline if there is such an oil glut right now? Pump Canadian maple syrup to the U.S. instead!
My guess is that the DAPL policy is influenced quite a bit by perceived geo-political risk. US energy independence from volatile Saudi and other exporters would provide some measure of greater control over the domestic economy. That could also explain some of the push for shale fracking plays, in spite of the environmental problems.
Regarding maple syrup, Quebec is the biggest producer by far. But many states such as Vermont, Maine and NY have seen tremendous production growth. So much so that there has been stories about Quebec losing its dominance soon. So no need for that pipeline for maple syrup either.
“At 259 million barrels, U.S. gasoline storage levels are now at their highest level since the EIA began tracking the data back in 1990”.
Well, at least they won’t have to worry about running out of fuel in their next war(s).
One of the little-known facts of the 1991 Gulf War was that by the end of the 100 hours of advance the coalition forces were very short of fuel. A decent-sized war in the area Poland/Ukraine/Caucasus would burn through the US ad NATO (and Russian) petroleum and lubricant reserves in weeks. A book written back in 1970 called Machine Age Armies argued that the trend would be for high tech forces to burn through their high-tech weapons and ammo in a short time, leaving infantry and towed artillery a la WWI behind. I think you can add fuel and lubricants to the mix.
Nick..am Surprised you have Over-looked Russia’s Technological Ability In Theater to Electra-magnetically Fry/Neutralize…..most Computer Driven War or Defense Programs…?
With all fuel supplies subject to appropriation by the military, a major petroleum exporter like Russia is not going to run out of fuel for a war on its border.
The bottleneck will be the delivery of same to the front, which like towed artillery. armor or massed infantry will be completely dominated by who ever achieves air superiority.
“Why is demand suddenly faltering”
I can tell you why in my world. I haven’t had to drive to a meeting in years and years. It’s all done online. Also, my kids are grown so there’s no carting them around town all week either. While i don’t “shop” online i look stuff up online and then just go to where the best price is to buy…..no real “shopping” involved…..AND, lets not forget, not having a raise in 20 years means there’s no vacations or travel of any kind going on just working twice as hard to earn half as much….I don’t think I’m alone in that last part either.
I’ve put 16,000 miles on the car in the last 26 months…I used to do that in less than a year.
Working from home is much more common today. But I suspect it’s less talked about because of the negatives associated with it.
That’s why the stock market is rocketing up. It’s anticipating lower costs.
Better question, why are miles driven suddenly skyrocketing after years in hibernation? https://www.fhwa.dot.gov/policyinformation/travel_monitoring/16dectvt/figure1.cfm
I’d love to get a broader view of this per-capita data – but the above trend represents an interesting state change. http://www.ssti.us/wp/wp-content/uploads/2015/03/Figure1.jpg
I would combine all of the reasons noted above.
Cars are more fuel efficient.
Aside from the UPS & FedX trucks running about (not fuel efficient) they do make a dent on the miles driven by the family car to re-supply.
More meetings and work can be done from home.
Less family vacations by road due to less money and expensive motels/hotels and eating out.
Baby boomers just need less ‘stuff’ anyway. I know I do.
So perhaps this is not a seasonal trend but more of a critical mass. If so, you can expect the excise taxes on fuel to go up. Something has to maintain our roadways.
“More meetings and work can be done from home.”
I was a patent examiner – now retired – and I have no doubt whatever that patent examining could now be done by automatons. Prior art can be scanned automatically and acted upon by artificial intelligence.
So, human examiners now work at home part of the time (new, since I was in the Patent Office), but automatons won’t have to go anywhere anytime, to shop or to work or anything else. As this reality is now arriving, vehicle fuel use will decrease. Other forms of energy, who knows?
Nine States raised gasoline taxes Jan. 1. Annnd check out California now going to tax EV/EV hybrids.
Well A Glut seems like a good thing for everyone – in the short term. Lower fuel prices will ease the less than good news coming from WolfStreet, but not so realized IRL, or on the business news hawks, I think one of them said DOW 25,000 Coming by Christmas. There are websites like this one and a few others that seem to be giving us news exactly the opposite from the main stream Wall Street folks.
I have noticed what seems like fewer cars on the highways mid-days, when I do a greater bit of driving. Also on those same highways – this winter there seems to be a lot less pot holes. And we did have a few snow storms so damage should be showing up.
Personally, I have shifted as much “shopping” as possible to online sources. I have been doing that for years, to the point that I am almost willing to pay more for something online, even if I can get it cheaper locally, – like a $7. Tube of RTV sealant. And in my area we have Shop Rite supermarkets. They have online ordering and home delivery. Both our area stores have 3 full size vans – they only had one each 2 years ago.
While it use to feel funny to get something online, now it feels funny to drive to get it.
I’m not sure I agree with the “cars are more efficient” thing. I see more people flooring-It, tail-gating, and screaming from stop light to stop light than before. And I’m sure there are more bigger vehicles on the roads today, vs. 6 years ago.
It’s almost as though everyone knows it’s all about to come crashing down around us, and everyone collectively is just standing there looking up and waiting to see who get’s it first…..
I can’t think of a reason the stock market is above 12,000, SnapChat valued at what $12 Billion ?? Apple $700 Billion…? Really ? It just all feels so unreal….. A humming economy with transports like trucking and shipping running below stall speed……. Something’s gotta happen…..
.
A $Billion is a new $Million. Facebook and Google websites combined are a cool $Trillion. What do you think is gonna happen..
So, we didn’t see this coming, huh?
The Commitment of Traders report has been lopsided on the bullish side for a few months now. There were almost no oil bears around!
When everyone goes to one side of the boat, the wise choice is to go to the other side.
And that’s what is playing out now.
Oil will fall below $50, then $40, before it finds a bottom.
Just a little “future think” to think about, folks:
The idea of rebuilding the bridges, roads, and freeways, the call for replacement “Infrastructure”, is misplaced, if you look ahead fifteen years.
In fifteen years time, instead of commuting to work, going to the store, you will have an android in place, who never comes home. Sort of a “virtual reality” type-of-thing. At the office, it will probably be a robot-android that looks like you (imagine, looking 23 (and good!) through every year of your forty-year career) but you’ll just stay home in your undies, looking through the eyes of your android, projected on a screen in front of you. Your robot-self goes to the meetings, and best, records everything (so you can play back exactly what was said). Same with the shopping robot. Finds stuff (though most stores are gone) and then sends it home in a driverless Lyft car…the real tiny one.
IMHO, life on the streets and downtown will look crowded, but all because of all the robot/androids! Few will “commute”, so rebuilding roads is not where to put the $$$.
This seems pretty plausible to me:
The whole article is pretty long, but maybe a few people could read the whole thing and comment if her reasoning is sound!
In order for the system to continue working, the prices need to be both:
Affordable by consumers
High enough for producers to cover their costs, including a margin for taxes and reinvestment
Now, in 2017, prices are “sort of” affordable for consumers, but they are not high enough for producers. Oil companies will go out of business if these low prices persist.
Back in 2007 and 2008, we had the reverse problem. Prices were high enough for producers, but too high for consumers (especially non-elite workers). This is a big part of what pushed the economy into recession.
https://ourfiniteworld.com/2017/02/20/oops-the-economy-is-like-a-self-driving-car/comment-page-3/#comments
For your reading pleasure and laugh for the day please check out the Saudi Vision 2030 website. They know their days are numbered. That peak oil theory didn’t turn out to be true now did it? This new vision should have been started 40 years ago. They are a little too late to the party to diversify the economy, educate the citizens and allow women some actual human rights in order to save it’s oil centric economy.
http://vision2030.gov.sa/en
The beheadings will continue until morale improves.
Wow
Yes, way too much. And it kept on growing. And totally off topic. This is not the place for it. At some point, I had to draw the line :-]