HardAssetsInvestor

Written by Sumit Roy  |

March 21, 2012

Crude Oil Report: U.S. Demand Nears 13-Year Lows, But Analysts Question Gov’t Figures

Details

Is the EIA underreporting demand in the world's largest economy?

The Department of Energy reported this morning that in the week ending March 16, U.S. crude oil inventories decreased by 1.2 million barrels, gasoline inventories decreased by 1.2 million barrels, distillate inventories increased by 1.8 million barrels and total petroleum inventories increased by 1.5 million barrels.

Crude oil prices traded slightly higher after the latest inventory figures, with Brent last trading near $124 and WTI near $107.

News that the governments of the U.S., U.K. and perhaps others may jointly release strategic petroleum reserves onto the market spurred a minor correction in crude over the past week. Brent has been unable to surpass the key $127 resistance level, but remains well within striking distance.

BRENT

WTI

Continued supply disruptions in Iran, South Sudan, Syria and Yemen have offset lingering demand concerns and rising inventories.

Total petroleum inventories in the U.S. are 40 million barrels, or 3.9 percent, above the five-year average, while demand plunged to 17.7 mmbbl/d, close to the 13-year lows set last month.

But while demand in the U.S. and likely other developed nations in Europe is certainly weak, some are questioning whether the Energy Information Administration's figures are overstating that weakness.

According to the agency's latest figures, total petroleum demand over the last four weeks has averaged 5.7 percent below the year-ago level. Gasoline demand was down 7.8 percent on that same basis, and distillate demand was down 8.5 percent.

"We refuse to believe [those figures]," said Jan Stuart, head of energy research at Credit Suisse.

Barclays' analyst Amrita Sen agrees. Demand is likely down no more than last year's 2.8 percent decline, she estimated.

At the heart of the issue is the EIA's methodology for calculating demand. In its formula, the agency uses gasoline production, imports, exports and the change in industry stockpiles to indirectly calculate what it calls product supplied, a proxy for demand.

While production, import and stockpile data is considered relatively accurate and timely, the export data is not so much. Recently, the EIA has understated exports, which have been growing significantly.

In turn, that inflated last year's demand figures, which make this year's figures look worse in comparison. Robert Merriam of the EIA says that gasoline demand is probably down closer to 4 percent than 7 percent.

But if so, that is still a significant drop in the face of an improving economy. Steady increases in fuel efficiency and high prices, which are discouraging driving, are likely to blame.