Latest consumption/demand data point to lower crude oil prices

Implications: The Oil & Gas Journal reported in the issue of August 4 that U.S. crude oil demand dropped 3% during the first half to 20.08 million bbl/day. It was the first large drop since 1991. The report was published July 18 by the American Petroleum Institute. Gasoline deliveries fell 1.7%. Remarkably it was the largest decline in 17 years. But demand for ultralow-sulfur diesel (ULSD) jumped 16%. Refiners are supplying the market with record diesel supplies. Gasoline has a greater share at the more discretionary consumer level. The high gasoline prices have caused the U.S. fall off in demand. It is not yet clear what higher prices are having internationally. Petroleum imports fell below 13 million bbl/day, the lowest level since 2003. Crude oil production in the Lower 48 U.S. states fell 2.1% during the first six months. Alaskan crude oil production was lower too. Exploratory drilling is up 53% this year and development drilling increased 15%. Industry is trying hard.

Analysis:  For the first quarter of 2008, the Oil & Gas Journal reported that total world demand was 85.43 million bbl/day while supply was 85.64 million. U.S. demand was 20.15 million bbl/day. Source of the data was the U.S. Department of energy International Petroleum Monthly. There was a positive addition to world inventories of 210,000 bbl/day. This latest API report shows that U.S. demand fell further in the second quarter to 20.01 million bbl/day. The unknown quantity is what will be the demand for the second half of the year. Given the general economic climate, a good guess is that increases in diesel demand will approximate additional declines in gasoline consumption. Even that could be wrong. If gasoline prices continue their downward slide, greater use of low mileage vehicles would occur. It is well established that existing world oil production of about 73.3 million bbl/day will continue to decline at a rate of about 300,000 bbl/day. Offsetting this will be about 250,000 bbl/day of new supply (using estimates based on an Oil & Gas Journal report of June 9).With what is known right now, inventories will stay level or rise further, ever so slightly. Speculators, who follow inventory adjustments closely, are likely to continue shorting the futures market until at least the end of the third quarter. Crude oil prices could slip further. But when third quarter inventory data become available in the October report, the yearly trend should be well established. By then, the Olympic Games in China will be history and the effect of some subsidy reductions in the Far East will be evident. With that data in hand, it should be possible to predict, more or less, what the demand/supply situation for 2009 will be (and by extension, price trends). Right now, it is anybody’s guess.