HardAssetsInvestor

Written by Sumit Roy  |

January 11, 2012

Crude Oil Report: Iran Offsets Bearish Fundamentals As US Gasoline Demand Hits Lowest Since 2003

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Oil demand in the United States plunges, leading to a big build in inventories.

The Department of Energy reported this morning that in the week ending Jan. 6, U.S. crude oil inventories increased by 5 million barrels, gasoline inventories increased by 3.6 million barrels, distillate inventories increased by 4 million barrels and total petroleum inventories increased by 9.4 million barrels.

Crude oil prices were down modestly after the latest figures, with Brent last trading at $112.73, while WTI traded at $101.48. Iranian supply concerns continue to support prices, as we wrote about last week.

But although geopolitical factors are supporting crude, the underlying fundamentals of the market are deteriorating, as Libyan supply comes back online faster than expected and as Saudi Arabian oil production holds at record levels near 10 mmbbl/d.

On the demand side, U.S. consumption notably hit the lowest level since May 2009 last week at 17.8 mmbbl/d. Gasoline demand is particularly weak, falling to 8.2 mmbbl/d last week, the lowest level since February 2003.

Over the last four weeks, total petroleum demand has been close to 1.25 mmbbl/d, or 6.5 percent, below the year-ago level. Gasoline demand has been down 4.8 percent, and distillate demand has been down 2.2 percent, according to the EIA.

It is reasonable to assume that the demand trends in Europe are just as bad or worse given that the region is in much worse shape economically amid its sovereign debt crisis.

Nevertheless, crude oil prices have been performing well against this challenging backdrop. Inventories are low after significant drawdowns last year when Libyan production went completely offline during the civil war in that country.

But if the U.S. is any indication, inventories are now rebounding swiftly to more comfortable levels. The push-and-pull of more a more bearish supply-and-demand outlook on the one hand and geopolitical concerns on the other will determine where crude oil goes from here.

From a technical perspective, Brent remains range-bound between $100 and $115, though it is currently very close to the upper end.

Source: Bloomberg

Meanwhile, WTI has maintained itself above the $100 level, but it has been facing resistance near $103 to $104.

Source: Bloomberg