John Kemp, Reuters
Global oil consumption is growing rapidly, helping account for the decline in reported inventories, the recent surge in prices and the shift in futures markets from contango to backwardation.
Consumption is much harder to measure than production, which is why the demand side of the market receives less attention. Even in the advanced economies, consumption data is only available with a delay of two months or more, and reliable data from emerging economies often not at all. Global demand assessments are therefore often educated guesswork, as analysts try to calculate how much oil has been used and how much is in storage.
But strong consumption growth has been at least as important as the restraint of production by OPEC and non-OPEC oil exporters in helping rebalance the oil market.
Global consumption rose by 1.6 million barrels per day (MMbbl/d) in 2016 and 2.0 MMbbl/d in 2015 as low prices and a synchronized economic expansion in most areas of the world spurred demand.
Consumption is forecast to increase by a further 1.6 MMbbl/d this year and 1.4 MMbbl/d in 2018, according to the International Energy Agency. And predictions have been consistently revised higher as demand data has come in stronger than forecast.
The fragmentary information which is available in near real-time all shows consumption in the United States and around the world growing strongly.
U.S. gasoline consumption hit a seasonal record in four of the five months between April and August, according to the U.S. Energy Information Administration.
Strong economic growth, cheap fuel, more driving and purchases of bigger vehicles have offset improvements in fuel economy since 2015.
U.S. consumption of diesel has also been running consistently higher than last year, reflecting the increase in oil and gas drilling as well as more freight movements.
With demand growing at home, U.S. refineries have been exporting record quantities of fuel to markets in Latin America and the rest of the world reflecting strong demand overseas as well as refinery problems in some emerging markets.
U.S. exports of crude and refined fuels were about 750,000 bbl/d higher in the three months from June to August than the same period in 2016. Increased exports included an extra 220,000 bbl/d of crude, 120,000 bbl/d of natural gas liquids, 147,000 bbl/d of gasoline, 225,000 bbl/d of distillate fuel oil and 47,000 bbl/d of lubricants.
The combination of strong demand at home and record exports has cut stockpiles of gasoline and distillate significantly since the start of the year.
Stocks have drawn down much faster than normal—despite U.S. refineries processing record amounts of crude most weeks since April.
U.S. gasoline stocks have fallen by 23 MMbbl since the start of the year compared with an average decline of 12 MMbbl over the previous decade.
U.S. distillate stocks have fallen by almost 34 MMbbl compared with an average seasonal decline of just 2 million between 2007 and 2016. The result is that distillate futures prices have moved into a small but persistent backwardation. Gasoline futures remain in contango, but here too the calendar spreads have been firming consistently since July.
Product prices have been rising even faster than crude as fuel markets tighten, with gross refining margins trending higher.
Higher margins should encourage refineries to maximize seasonal runs and spread the current tightness from products into crude stocks. In this context, OPEC has been “leaning into the wind” by restraining production while demand growth absorbs excess inventories inherited from the slump in 2014-2016.
OPEC estimates excess OECD oil stocks have already been reduced by around 180 MMbbl since the start of the year but were still 160 MMbbl above the five-year average in September. Most of the remaining surplus is concentrated in crude rather than products, with crude stocks 146 MMbbl above the five-year average but product stocks only 25 MMbbl over in August.
However, tight product markets and strong refining margins should incentivize high refinery run rates and cause crude markets to tighten further in the months ahead.