Oil climbing on strong demand and weak dollar

This morning the IEA raised their oil demand projection for this year above last month’s figures on signs that demand in some of the key developing countries (U.S., Germany and Japan in particular) actually increased last quarter more than originally expected. Their projection for 2010 demand is now at 86.9 million barrels per day with an expectation of rising by another 1.3 million barrels per day to 88.2 million barrels per day in 2011 in spite of an underperforming global economy. Overall, the forecast is a positive for oil prices and supports the growing view that oil fundamentals are in a transition and likely heading to a phase that should see the overhang in inventory starting to dissipate. In fact the IEA indicated that preliminary data for September is showing a strong 31.7 million barrels draw in global oil inventories. Later today the Energy Information Administration (EIA) will release their monthly Short Term Energy Outlook forecast which is likely to be in the same light as the IEA report and OPEC’s forecast (which was released yesterday and also showed an increase in demand). The highlights of the report follow.

Benchmark crude futures were range-bound in September but by early October had breached the $80/bbl mark. Stronger demand, a rebound in financial markets, a weaker dollar and a major strike at French ports converged to propel prices higher. Benchmark Brent was last trading around $83/bbl and WTI at $81.50/bbl.

Global oil demand for 2010 and 2011 is revised up by 0.3 mb/d on average to 86.9 mb/d and 88.2 mb/d, respectively, on new data showing much stronger-than-expected 3Q10 readings, notably in the OECD, and updated GDP and price assumptions. Yearly growth is now +2.1 mb/d in 2010 and +1.2 mb/d in 2011. If GDP growth were a third lower, demand growth would only reach 0.4 mb/d in 2011.

Global oil supply fell by 150 kb/d to 86.9 mb/d in September on lower non-OPEC output, but was up by 1.5 mb/d year-on-year, shared equally between non-OPEC, OPEC crude and NGLs. Estimated 2011 non-OPEC supply is raised by 150 kb/d to 53.1 mb/d on stronger U.S., Canadian and Chinese output, growing from 52.6 mb/d in 2010.

OPEC crude oil supply rose by 40 kb/d, to 29.29 mb/d in September. The ‘call on OPEC crude and stock change’ is raised to 29.8 mb/d in 3Q10 and 29.0 mb/d in 4Q10, after a large upward demand revision. The 2011 ‘call’ averages 29.3 mb/d, up by 0.1 mb/d from 2010.

August OECD industry stocks rose by 15.8 mb to 2 790 mb, or 61.1 days, reaching their highest level since August 1998. Preliminary data point to a sharp 31.7 mb draw in September, while oil in floating storage increased slightly.

Global refinery crude throughputs are revised up by 0.7 mb/d for 3Q10, to 75.3 mb/d, or 1.8 mb/d above 3Q09. Stronger runs in North America and Europe, shadowing revisions to oil product demand, as well as record-high runs in Brazil and Russia contributed. 4Q10 runs are to fall seasonally to 73.8 mb/d, in line with the expected slowdown in oil demand growth.

Staying with the fundamental theme, today also starts the weekly inventory cycle in the U.S. with the release of the API report late this afternoon followed by the more widely watched EIA report on Thursday morning at 10:30 am EST as both reports were delayed as a result of yesterday’s Columbus Day holiday in the U.S. My projections for this week’s inventory report are summarized in the following table along with a comparison to last year as well as to the five year average for the same week. I am expecting a mixed report with a minor build in crude oil (as a result of refinery utilization rates declining) and modest draws in both gasoline and distillate fuel. If the actual numbers are in sync with my projections for a crude oil build of 1 million barrels, it would raise a question mark about the early start of a destocking trend in crude oil seen over the last few weeks. However, the declines to date have not had any significant impact on the overhang that has persisted in the U.S. throughout the entire economic recovery. As such, I would categorize this week’s crude oil inventory data as biased to the bearish side as the year-over-year surplus will still be around 24.2 million barrels while the overhang versus the five year average for the same week will have in fact widened modestly to 41 million barrels.





Change from

Change from



Last Year

5 Year


vs. Proj.

vs Proj.

Crude Oil












Ref Change Level




Utilization %




With runs expected to decline by 1.4% and demand holding, I am expecting a modest draw in gasoline stocks and in distillate fuel. Gasoline stocks are expected to decline by about 500,000 barrels as refiners continue to wind down from the higher demand summer driving season and turn their attention to the upcoming winter heating season. This week the gasoline year over year overhang is projected to widen slightly to 10.3 million barrels while the surplus versus the five year average for the same week will be down to 18.1 million barrels. The industry seems to be starting to work off the surplus that has remained since the end of the driving season in an effort to at least put a floor on gasoline prices heading into the winter heating season.

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