Crude: The demand downers

May 16, 2018 08:27 AM
Daily Energy Market Analysis

The International Energy Agency (IEA), or as I call them the “demand downers,” once again are raising concerns about global oil demand. The agency that has consistently underestimated global oil demand is once again trying to keep their weak demand illusions in the spotlight. A few years ago, it was because that despite the low price, demand would be bad despite clear evidence to the contrary.

The IEA is worried that we will see demand destruction because of higher oil prices. Yet, are we seeing demand destruction? At what point does the price of oil cut demand.? Well, we are not there yet.

The IEA reported that “Global oil demand growth for 2018 has been revised slightly downwards from 1.5 mb/d to 1.4 mb/d. While recent data confirms strong growth in 1Q18 and the start of 2Q18, we expect a slowdown in 2H18, largely attributable to higher oil prices. World oil demand is expected to average 99.2 mb/d in 2018.”

Is high price slower demand a false narrative? Just because prices rise, it does not always hurt global demand. While rising prices can hurt demand in some cases; if it is being driven by demand it is a normal function of price reflecting growing demand, and it will encourage investment to keep feeding that demand. From 1999-2007 we saw oil prices rise driven by global demand growth in China and rising prices on average did not slow demand.  In fact, the oil price rose along with demand until we saw a separation from that relationship as the mortgage crisis developed. 

The International Energy Agency might see its “demand destruction,” but only if it is caused by a geopolitical or weather premium spike. That risk is real as we are seeing potential geopolitical problems that could potentially cause a shock to the market if we see a price spike due to a sudden loss of supply. 

The IEA talks its book when it comes to demand. They use their demand forecasts to lower prices so the oil consuming nations they represent can buy oil at lower prices. The reason why this irks me is that many people look to this forecast to make designs about investing and their past doom and gloom about demand probably led to less energy investment that was needed to feed growing global oil demand.

OPEC, on the other hand, raised their demand forecast by 25,000 bpd from the April report, to 1.65 million bpd. They said the upward revision was due to economic data in OECD countries being stronger than expected in the first quarter of this year. They also say better data In China, India and Latin America would cause oil demand to flourish. They also reported that the biggest oil glut in the history of the world has been virtually eliminated. OPEC put oil inventories in OECD industrialized nations to just 9 million barrels above the five-year average, down from a record 340 million barrels above the average in January 2017.

The IEA, on the other hand, said that global oil supplies held steady in April at close to 98 mb/d. Robust non-OPEC output offset lower OPEC production. Strong non-OPEC growth, led by the U.S., pushed global supplies up 1.78 mb/d on a year ago. Non-OPEC output will grow by 1.87 mb/d in 2018, a slightly higher rate than seen in last month's Report.

Bloomberg News also wrote that front-month West Texas Intermediate crude futures are on track to close at the largest discount to second-month futures in more than three weeks.

The spread had traded in backwardation up until Monday. A switch to contango, where upfront supplies sell for less than later-dated barrels, might be a warning sign for the bulls. WTI for June delivery slipped Tuesday after rallying above $71 a barrel this month.

The API reported a bigger than expected build in Crude supply as refinery maintenance and glitches and talk of more oil released from the Strategic Petroleum Reserve is the likely culprit the supply increase. The API reported that crude supply increased by 4.845 million barrels versus an expectation of a draw of 1.75 million barrels. Still, the increase in Cushing, Okla., supply was only 62,000 barrels versus an expectation of 550,000 barrels.  Yet a big drop in Gasoline supply of 3.369 million barrels and a 768,000-barrel drop in distillate should give the market some support.

Even with a price pullback, WTI could be supported on the unwinding of spreads. The high price of Brent is attracting U.S. exports. Reuters is reporting that U.S. crude arriving in Asia hit an all-time high of close to 25 million barrels in May with cargoes discharging in China, South Korea, Singapore, India and Malaysia, according to trade flows data on Eikon. The volume dips to about 19 million barrels in June but is set to rebound again in July after U.S. crude futures slipped to the widest discount in three years against Brent this week, according to traders and Eikon data.

The market seems unworried that North Korea is threatening to pull out of talks with South Korea. In Iran, Reuters is reporting that Iraq “already pressured by the U.S. withdrawal from the nuclear deal, Iran faces a major test in managing Shi’ite cleric Moqtada al-Sadr, a formidable opponent who beat Tehran’s longtime allies to achieve a shock victory in Iraq’s parliamentary election. But If Tehran overplays its hand by squeezing Sadr out of a coalition government dominated by its allies, it risks losing influence by provoking conflict between Iranian-backed Shi’ites and those loyal to Sadr. Populist Sadr all but won Iraq’s parliamentary election by tapping into growing public resentment directed at Iran and what some voters say is a corrupt political elite that has failed to help the poor. But Iran is unlikely to relinquish influence in Iraq, its most important ally in the Middle East, and will push for a coalition that will preserve its interests.”  Sadr is not a United States friend as he led a collation against the United States, killing many Americans.

The Guardian is reporting that U.S.-based cereal maker Kellogg says it is pulling out of Venezuela because of the economic deterioration in the country. Workers said they were prevented from entering the plant in the central city of Maracay on Tuesday. The announcement comes ahead of Sunday's presidential elections. President Nicolas Maduro, who is standing for re-election, told a rally that he would hand control the factory over to the workers. "We've begun judicial proceedings against the business leaders of Kellogg's because their exit is unconstitutional," Mr. Maduro told cheering supporters in the central state of Carabobo. So start your day with Maduro flakes! Therrere Greeeeat! Or maybe it is Maduro is a flake.

About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.