As I have said on numerous occasions, the price of oil seems to be tracking very close to the same pattern we saw in 2008-2009. From mid-2008 to early 2009, WTI dropped for seven months ($147 to $35), flopped around at the bottom for four months and twelve months later was back on the long-term trend line, around $80/bbl and within in a year it was back over $100/bbl.
What fueled the rebound in 2009 was increasing demand for refined products, caused by lower fuel prices and a rebound in the global economy (also aided by low fuel prices). In mid 2009 EIA and IEA demand forecasts were around YOY increase of 1 million bbls per day. Demand forecasts rose month after month and actual demand went up close to 3 million bbls per day during a twelve month period (mid-2009 to mid-2010). I believe future demand forecasts today are grossly understated. I think we will see a pattern very similar to the 2nd half of 2009. Price for fuel does have an impact on demand, primarily because it puts more money into the pockets of consumers. - Dan
Below is a report I received this morning from our friends at Morgan Stanley.
Refining & Marketing
May 26, 2015
The “Big D:” Demand Trending Higher
Demand continues to surprise to the upside supporting a more favorable refined products outlook in 2015/2016. Memorial Day weekend is the start of US driving season and with gas prices down +30% yoy, airline ticket prices flat, and a strong US economy, we expect positive summer demand revisions.
Demand rising as US driving season begins.
The EIA and IEA, the two primary oil market forecasters, continue to raise global demand estimates as the effect of lower oil prices is felt. We expect US demand data will continue to strengthen into the summer and drive further positive revisions as low prices motivate consumption. US “driving season,” the period when many Americans travel by road, began this past Memorial Day weekend and we see positive demand tail winds given:
(1) US average gasoline price is the lowest since 2009, despite strength in the West Coast where supply disruptions pushed gasoline prices to $3.51/gal, 77c/gal higher than the U.S. average;
(2) US gasoline prices are down +30% YoY while airline tickets are flat supporting a shift in travel means by consumers; and
(3) US oil demand is the highest in 20 years and total US refined product demand has grown +4.0% y/y for last several weeks, the highest US growth rate in the last 20+ years, indicative of a strong consumer economy.
We believe strong demand growth is contributing to tightness in the products markets supporting significantly higher y/y gasoline and distillate cracks. The American Automobile Association (AAA) also expects a strong start to driving season predicting a 5.3% rise in Memorial Day car travel to the highest level in 10
years. The chart below shows average retail gasoline prices vs. airline passenger yield (passenger revenue ($) per revenue passenger mile: the best indicator of ticket price. Retail gasoline prices are down 30% y/y while airline passenger yield is flay y/y, indicating airlines have not passed on the benefits of lower jet fuel prices to passengers. We believe the arbitrage will encourage rational consumer behavior and a shift in travel patterns over the summer.
Demand Increasing
Demand Increasing
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: Demand Increasing
Energy Information Administration (EIA): demand estimates rising. EIA estimates that global
consumption of petroleum and other liquids which grew by 0.9MMb/d in 2014 will grow by 1.2MMb/d in
2015 and by 1.3MMb/d in 2016. May's global consumption growth was revised upward from April's by an
average of 0.2MMb/d for both 2015 and 2016. Consumption outside of the Organization for Economic
Cooperation and Development (OECD) countries, which grew by 1.2MMb/d in 2014, is projected to grow by
0.9MMb/d in 2015 and by 1.2 MMb/d in 2016. Lower forecast non-OECD consumption growth in 2015 mostly
reflects a 0.2MMb/d decline in Russia’s consumption as a result of its economic downturn. Per EIA, China
remains the main source of non-OECD oil consumption growth, with a projected annual average increase of
0.3MMb/d in both 2015 and 2016. OECD petroleum and other liquids consumption, which fell by 0.4 million b/d
in 2014, is expected to grow by 0.3MMb/d in 2015 and by 0.1MMb/d in 2016. The US is the leading contributor
to projected OECD consumption growth, with U.S. consumption increasing by 0.3MMb/d in 2015 and by
0.1MMb/d in 2016. Japan and Europe accounted for nearly all of the 2014 decline in OECD oil consumption.
Japan’s consumption is expected to continue declining over the next two years, albeit at a slower rate than in
2014, while Europe’s consumption is expected to stay relatively flat.
International Energy Agency (IEA): demand estimates rising. While IEA data tends to lag by up to three
months, they have also uncreased their global oil demand forecast for 2015 by 90Mb/d to 93.6MMb/d, a
gain of 1.1 MMb/d on 2014. As per IEA improvement in the OECD economic outlook and colder weather
conditions in Europe in 1Q15, drove positive revisions. In its May report, IEA revised upwards 1Q15 demand by
130Mb/d, as demand in China, Germany, Saudi Arabia and Turkey was better than expected, however it
maintained its forecast for the year as it tempered growth expectations for Brazil and US. According to IEA ,
despite escalating up to around 1.4MMb/d in 1Q15, global oil demand growth is expected to ease over the
remainder of 2015, as the positive stimuli from colder weather conditions eases along with projections of
plateauing economic growth as per IMF's April report. IEA forecasts US demand at 19.2 MMb/d in 2015, we
believe this forecast is conservative as YTD demand has averaged ~19.5MMb/d and we are yet to see the bump
from summer gasoline season. IEA expects total Chinese product demand to be up 2.8% y/y. Chinese motor
gasoline is projected to grow at 5.9% y/y and jet fuel at 3.8% y/y. Offsetting these, diesel oil demand is
forecasted to decline 1.4% and residual fuel oil demand is expected to decline by 20.6%.
consumption of petroleum and other liquids which grew by 0.9MMb/d in 2014 will grow by 1.2MMb/d in
2015 and by 1.3MMb/d in 2016. May's global consumption growth was revised upward from April's by an
average of 0.2MMb/d for both 2015 and 2016. Consumption outside of the Organization for Economic
Cooperation and Development (OECD) countries, which grew by 1.2MMb/d in 2014, is projected to grow by
0.9MMb/d in 2015 and by 1.2 MMb/d in 2016. Lower forecast non-OECD consumption growth in 2015 mostly
reflects a 0.2MMb/d decline in Russia’s consumption as a result of its economic downturn. Per EIA, China
remains the main source of non-OECD oil consumption growth, with a projected annual average increase of
0.3MMb/d in both 2015 and 2016. OECD petroleum and other liquids consumption, which fell by 0.4 million b/d
in 2014, is expected to grow by 0.3MMb/d in 2015 and by 0.1MMb/d in 2016. The US is the leading contributor
to projected OECD consumption growth, with U.S. consumption increasing by 0.3MMb/d in 2015 and by
0.1MMb/d in 2016. Japan and Europe accounted for nearly all of the 2014 decline in OECD oil consumption.
Japan’s consumption is expected to continue declining over the next two years, albeit at a slower rate than in
2014, while Europe’s consumption is expected to stay relatively flat.
International Energy Agency (IEA): demand estimates rising. While IEA data tends to lag by up to three
months, they have also uncreased their global oil demand forecast for 2015 by 90Mb/d to 93.6MMb/d, a
gain of 1.1 MMb/d on 2014. As per IEA improvement in the OECD economic outlook and colder weather
conditions in Europe in 1Q15, drove positive revisions. In its May report, IEA revised upwards 1Q15 demand by
130Mb/d, as demand in China, Germany, Saudi Arabia and Turkey was better than expected, however it
maintained its forecast for the year as it tempered growth expectations for Brazil and US. According to IEA ,
despite escalating up to around 1.4MMb/d in 1Q15, global oil demand growth is expected to ease over the
remainder of 2015, as the positive stimuli from colder weather conditions eases along with projections of
plateauing economic growth as per IMF's April report. IEA forecasts US demand at 19.2 MMb/d in 2015, we
believe this forecast is conservative as YTD demand has averaged ~19.5MMb/d and we are yet to see the bump
from summer gasoline season. IEA expects total Chinese product demand to be up 2.8% y/y. Chinese motor
gasoline is projected to grow at 5.9% y/y and jet fuel at 3.8% y/y. Offsetting these, diesel oil demand is
forecasted to decline 1.4% and residual fuel oil demand is expected to decline by 20.6%.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group