While oil price fell for a sixth day in a row, gasoline seemed to mount a rally. According to the Department of Energy, gasoline demand improved last week but is it possible that the demons are not quite as bad as the Energy Information Administration seems to suggest! Well at least one person thinks so and that one person is none other than the Princess of Petrol, Trilby Lundberg. Trilby, the independent thinker that she is, is looking at her research and says that gasoline demand may not be so tepid after all.
Trilby points out that the demand figures from the American Petroleum Institute and the Energy Information Administration are at odds. The EIA reported that March demand fell 2% but data from the American Petroleum Institute actually showed an increase of 3% which is quite a difference. In fact according to Trilby, gas demand is probably stronger than that and in part may explain yesterday’s gasoline draw.
The EIA reported yesterday that gasoline production increased last week, averaging nearly 9.1 million barrels per day. They showed gasoline imports at 607 thousand barrels per day. Yet gasoline supply fell by 2.6 million barrels. While demand increased week over week the truth is that recent numbers seem to suggest that demand is actually stronger that the EIA is suggesting. According to Lundberg demand should be on a pace to grow at 1.2%.
Trilby believes that the EIA may need a larger budget to keep up with the growing complexities of measuring gas demand. Trilby says that after the record high gas demand peak and subsequent demand crash that perhaps it was overstated. The move to smaller cars and fewer miles driven are probably being overstated.
As far as crude supply in the United States, it is at the highest level since before the First Persian Gulf war in August 1990. The EIA showed that crude oil supply increased by 3.65 million barrels as imports averaged about 9.0 million barrels per day last week which was up by 145 thousand barrels per day from the previous week. Crude oil refinery inputs averaged 14.7 million barrels per day during the week ending May 4, 35,000 barrels per day above the previous week’s average. Refineries operated at 86.4% of their operable capacity last week. Gasoline production increased last week, averaging nearly 9.1 million barrels per day. Distillate fuel production increased last week, averaging just less than 4.4 million barrels per day. The refiners are getting ready to ramp up, yet the stronger demand may slow the recent price collapse.
I thought I was the only one that thought this recent upturn in gas was a bit crazy yet I have a kindred spirit in today’s Wall Street Journal. Liam Denning wrote a great piece on natural gas saying that natural gas stages a rally but not a recovery. Liam writes, "The energy world's most hopeless case just twitched an eyebrow. But natural gas isn't ready to leave intensive care just yet. Having plunged below $2 per million British thermal units in April, front-month gas futures have since bounced 27%. This reflects rekindled hopes that bloated gas inventories might moderate. These typically get run down during winter and rebuilt over summer, peaking in late fall. But there are tentative signs of change. U.S. gas supply fell slightly month-on-month, by 0.5%, in February, according to government data released in April. That isn't earth shattering: Year-on-year, production was still up 10.4%, or 6.8 billion cubic feet per day. Still, it is a step in the right direction.
More encouraging is that low prices have persuaded electricity generators all over the country to use gas-fired power plants over coal-fired ones where possible. Such switching boosted gas demand by an estimated six billion cubic feet a day in April, says Teri Viswanath at BNP Paribas. If maintained across the year, that would equate to an extra 9% of demand and use up most of the extra gas supply seen so far in 2012.
The problem is, there are good reasons to expect fuel switching to slow. Demand for gas-fired power likely received a boost from an unusually high amount of nuclear capacity being closed for maintenance and refueling from mid-February through late March. In addition, power generators tend to buy coal under multiyear contracts. So even if current prices tell them to burn more gas, the resulting buildup in coal inventories complicates the switching decision and also pushes coal prices lower, meaning gas prices must also fall to compete.
Arun Jayaram of Credit Suisse expects coal-to-gas switching to moderate to an average level for 2012 of 3 billion cubic feet a day. That is helpful but would likely not be enough to prevent gas-storage capacity being maxed out in the fall.
Raoul LeBlanc of PFC Energy says the good news is that the inventory problem, "has to be solved by October." But he adds: "The bad news is that the problem has to be solved by October." In other words, the medium-term outlook for gas looks better given currently low prices and regulatory and economic trends favoring greater demand. Barring a rapid reduction in supply, though, the risk of a forced liquidation causing gas prices to plummet remains real this summer. Beware of a relapse.” A must read in today’s Journal!