HardAssetsInvestor

Written by Sumit Roy  |

January 19, 2012

Crude Oil Report: Global Supply To Outstrip Demand By Nearly 1 Million Barrels A Day In 2012, IEA Says

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Inventories may recover to healthier levels thanks to forecast surge in non-OPEC supply, but is the IEA too optimistic?

 

The Department of Energy reported this morning that in the week ending Jan. 13, U.S. crude oil inventories decreased by 3.4 million barrels, gasoline inventories increased by 3.7 million barrels, distillate inventories increased by 0.4 million barrels, and total petroleum inventories decreased by 2.1 million barrels.

 

 

Crude oil prices were up modestly after the latest figures, with Brent last trading at $111.27, while WTI traded at $101.23.

Prices are still considered range-bound as Brent remains in its $100 to $115 band. Although recent geopolitical concerns in Iran and Nigeria boosted prices toward the top end of the range, the benchmark has been unable to break out above the $115 level.

 

 

 

Sentiment in financial markets has been positive, as evidenced by the uptrend in stocks. The S&P 500 hit five-month highs above 1315 today, yet crude has not benefited.

 

 

There are two reasons for oil’s recent underperformance. First, the commodity outperformed during the eurozone-inspired market sell-off late last year due to ongoing concerns related to Libyan supplies and low inventories.

Now that inventories are recovering due to an improving supply situation, prices are naturally underperforming. The demand side is also weakening quite significantly as the latest data from the EIA reveal (discussed in the following pages). Last week, U.S. gasoline demand fell below 8 mmbbl/d for the first time since September 2001.

In its latest Oil Market Report, the International Energy Agency said that global oil demand fell in the fourth quarter of last year for the first time since the credit crisis of 2008/2009.

• The agency now forecasts weaker growth of 1.1 mmbbl/d for 2012, down from 1.3 mmbbl/d previously.
• Non-OPEC supply growth may total 1 mmbbl/d, according to the IEA.
• OPEC crude oil output hit 30.89 mmbbl/d in December, up 0.24 mmbbl/d from November, and the highest level in more than three years.

At current rates of production from OPEC, global supply may outstrip global demand by almost 0.9 mmbbl/d, which will help OECD inventories recover from below the five-year average. U.S. inventories, specifically, are already above the five-year average, according to the latest data from the EIA (discussed in the following pages).

The key wild card in all this data is non-OPEC supply. The IEA’s forecast of 1 mmbbl/d growth may prove to be too optimistic, which has been the case in recent years. Last year at this time, the agency forecast growth of 0.6 mmbbl/d for 2011, but the latest data indicate that non-OPEC supply didn’t grow at all in the year.

 

 

Turning to this week’s EIA inventory figures, total petroleum inventories in the U.S. fell by 2.1 mmbbl, against the five-year average of a 3.2 mmbbl build. In turn, the inventory surplus fell to 17.9 mmbbl, or 1.7 percent.

 

 

Crude oil inventories fell by 3.4 mmbbl, against the five-year average of a 2.3 mmbbl build. In turn, the surplus in the crude category fell to 9.1 mmbbl, or 2.8 percent.

Regionally, inventories inside the Midwest rose slightly, while inventories outside the region fell.

 

 

 

 

Gasoline inventories increased by 3.7 mmbbl against the five-year average of a 4.8 mmbbl build. The surplus in the category fell to 4.3 mmbbl, or 1.9 percent. Distillate inventories rose by 0.4 mmbbl against the five-year average of a 0.4 mmbbl decline. In turn, the distillate surplus now stands at 0.2 mmbbl, or 0.1 percent.

 

 

 

 

Demand

Total petroleum demand in the U.S. rose slightly to 17.9 mmbbl/d, but remains near the lowest level since May 2009. On a four-week rolling basis, total demand was down by 7.2 percent from last year. On that same basis, gasoline demand was down 6.1 percent and distillate demand was down 4.4 percent.

 

 

 

 

 

Imports

Crude oil imports plunged 1.6 mmbbl/d week-over-week to 8.3 mmbbl/d. On a four-week rolling basis, imports have been 0.3 mmbbl/d above the year-ago level.

 

 

 

 

 

Refinery Activity

Refinery utilization fell to 83.7 percent from 85.6 percent. Utilization is close to the five-year average, but above the year-ago level. Gasoline production rose to 8.8 mmbbl/d. Distillate production fell to 4.5 mmbbl/d.

 

 

 

 

 

Miscellaneous

U.S. crude oil production fell to 5.726 mmbbl/d, slightly down from recent eight-year highs. Output has been rising swiftly thanks to surging production in unconventional oil plays. Year-to-date, production has been up 395K bbl/d, or 7.3 percent, year-over-year.

 

 

Inventories at the NYMEX delivery point in Cushing, Okla., fell by 0.8 million barrels to 28.3 million barrels, or 51 percent of the EIA’s estimate of capacity. That’s the lowest level since November 2009. Overall Midwest inventories rose by 0.1 million barrels to 92.7 million barrels, or 83 percent of estimated storage capacity.

Front-month WTI calendar spreads remained in mild contango at -$0.16.

Front-month Brent calendar spreads narrowed from +$0.17 to +$0.10, or mild backwardation.

West Texas Intermediate’s discount to Brent fell week-over-week to -$9.89 from -$12.16. WTI’s discount to Louisiana Light Sweet fell to -$8.40 from -$10.95.