This week's TWIP and record world demand for oil

Te EIA released their “This Week in Petroleum” today, with an article on American demand over the past year plotted by month. I had not seen the data presented that way before, and since you may not have, either, here it is:

Change in overall demand in the USA (EIA )

It is spread over two years so that you can see that demand bottomed out in May 2009, and has been rising ever since. As they point out, a growth of almost 1 mbd over last year is a very significant increase in demand, which just about offsets the similar sized drop in demand back a couple of years ago as the crisis began to develop.

If one notes that the plot ends in September, and then goes to the refinery input plot for this past week, that too is kicking up significantly, though at only about half the earlier gain y-o-y.

UPDATE: Because of these evidences of continued rising demand, the IEA has just raised its forecast of demand for next year by another 260,000 bd to 88.8 mbd.

Though in the period between these two points the input reverted to close to being the same as last year.


Gasoline demand does not show as high an increase, with most of the increase in production going into distillates.




That steady increase is a little odd, except that is being used to keep stocks up, given that demand has suddenly dropped off:

(The above figures are from today’s TWIP

At the same time ethanol production has steaily continued to climb to the point where it has now set a new record at 0.939 mbd.


Elsewhere in the world Wood Mackenzie is noting that we appeared to have returned to consumption levels from before the recession. In fact a new record has been reached:

Worldwide oil demand for this year’s third quarter will set a record at 88.3 million b/d, said Wood Mackenzie Ltd., Edinburgh, in its latest analysis. 

According to the report, provisional data shows that global oil demand for the recent quarter will almost certainly exceed the previous highest quarter—the fourth quarter of 2007—when demand averaged 88 million b/d.



Just 3 years from the onset of the great recession, global oil demand has recovered to the pre-recession peak seen in 2007, the report said.

The IEA is predicting that this new level will be close to the average demand for the whole of 2011 but it may be that those predictions are already behind the times.

Assuming that this is the case, then the talk of seeing crude over $100/bbl in the near future is likely to become more true than less. Not that this will cause much concern among the OPEC ministers soon to meet in Ecuador, and certainly it is not going to be a concern if, as Lybia’s minister predicts, oil reaches the $100 figure. Should that occur it might be that quotas get loosened a little, but that is unlikely to occur before the next meeting next June. Which might suggest that the projection of $100 oil may be exceeded quite a bit sooner than most people think. There is, after all, only so much oil still stored around the world in tankers.

The Chinese diesel situation

Well it appears that we are about back up to $90 a barrel oil which is the top end of the range which the Saudi Oil Minister said he was comfortable with, the other day. However, I suspect that were it to go higher, it would not change the current Saudi plans on oil production.

It might, however, draw more attention to the problems of dealing with an increasing demand for oil, in face of a limited ability to meet that demand. OPEC have just announced that they see next year’s average demand to be at 87 mbd, up about 120,000 bd over their estimate last month. Whether that projection proves realistic will depend on what happens in Asia.

Refineries in Asia have been faced with an increased demand from China, where there have been recent shortages of diesel across country, likely leading to the price increases that have just been imposed. Part of the cause of the increase is because refineries in China were reported to be losing up to $18 a barrel in refining oil they were buying at $80 a barrel. (Diesel was at $2.43 a gallon, and prices have been raised 10%, which given the current oil price, still leaves the refineries making a loss). Nevertheless Chinese government data shows that refining reached a record volume (8.8 mbd) in October, at the same time that overall Chinese crude imports fell for the month. In light of the increased demand it is expected that this month’s production will be even higher. Sinopec will also import feedstock for ethylene production so that refineries that were being used to supply the feed can, instead, concentrate on making diesel.

The unexpected size of the problem has been caused by the Chinese government trying to lower electricity consumption to meet a national target for energy savings by the end of the year. As a result of those decisions coal-fired power fell back, in October to the levels of a year ago, after an earlier increase. Because of these cuts in power, those who still need it (including metal production plants) have switched to diesel generators, with the increase in demand overwhelming the available supply. (Though some have had to close including 100,000 tons of aluminum smelting capacity). Thus the situation may be transient and improve, with electricity supply, after the end of the year, though that is not necessarily a given at this point, since it is dependant on government policies. (And hidden in that discussion has been the Chinese record refinery outputs of gasoline, which also hit a new record this month.)

For countries in Asia outside China the situation is reversed. With the profit on refining Dubai crude at over $14 a barrel in Singapore, refineries around the region are seeking to increase imports of crude. (China has been a net exporter of diesel until recently, but demand had grown, until recently, at 13% this year leading China to the potential switch to becoming a net importer of diesel, though that is debatable.) There are thus some strains evident in current ability to match existing demand.

In addition to getting additional supplies of crude from Russia, China has also increased crude imports from Iran, helping that country at a time when gasoline rationing and sanctions are being blamed for an 18% drop in internal gasoline demand.

In the United States there has been an increase in distillate demand according to the latest TWIP that is somewhat greater than usual:

(EIA)

The heating season is however anticipated to be, in general warmer than usual (sorry NorthEast), reducing heating fuel needs.

Fuel expenditures for individual households are highly dependent on local weather conditions, market size, the size and energy efficiency of individual homes and their heating equipment, and thermostat settings. The National Oceanic and Atmospheric Administration (NOAA) projects population-weighted U.S. heating degree-days will be about 4 percent lower than last winter. However, heating degree-day projections vary widely between regions. For example, NOAA projects that the South, a large market for propane, will be about 17 percent warmer than last winter, while the Northeast will be about 4 percent colder. The largest residential propane consuming region is the Midwest, where 8 percent of the homes heat with this fuel. Projected temperatures in this area are 2.2 percent warmer than last year. EIA projects Midwest propane prices to increase by 18 percent this winter while consumption in that region falls by 2.3 percent, resulting in an expenditure increase of 15 percent.

Oh, and in case you missed it, following my piece on explosives on Sunday, just to prove that not everything in life goes perfectly, here is a chimney demolition falling the wrong way.

Gasoline demand, August driving and winter weather

Wednesdays are when the TWIP (This Week in Petroleum) is issued by the EIA. Today’s cover note deals with the relatively changing prices of distillates (which includes diesel) relative to gasoline. In the past year the United States has become a net exporter of distillate, and even though the market has fallen, continues to be one, averaging about 350 kbd.

Looking at the gasoline demand, as we move further into a winter heating season, with less driving, there has been a fall-off in demand, though it is still higher than a year ago.

U.S. gasoline demand (TWIP )

When one contrasts this with the changes in driving patterns, now available from the FHWA for August, overall travel is up some 0.7% over August of 2008. Looking at the curve above the greatest impact of the recession on gasoline demand did not occur until September last year, and so this shows a further increase in the recovery. That is best shown by the running 12-month of vehicle miles driven.

12 month running total of vehicle miles driven in the USA. (FHWA)

The upturn in the curve is now clearly defined. The gains are not, however, this month distributed around the USA. Both the North East and the North Central parts of the country are showing a decline in driving, and it is in the South and West that there have been the gains, with Texas and the South Gulf showing the largest increase of some 1.7% over last year. Both urban and rural driving are still showing gains over last year, though now falling away from parity with 2007 (which rural driving almost matched for a short time in July).

We are left to await the coming winter, with the debate as to how hot it will be, relative to normal, given the El Nino condition. Going to the NOAA Winter Outlook prediction site, the winter is largely predicted to be warmer than usual across the country, and as a general rule perhaps a little drier in some parts, though wetter along the coasts. That may help (?) encourage driving over burning winter fuel – we’ll just have to wait and see how it plays out.

Winter outlook for temperatures.

Winter outlook for rain and snow.

These predictions are relatively-short term and it will be interesting to come back to this page in the Spring, and see how accurate the predictions were. (Likely better than mine from 30-years ago, to which I hope to return, perhaps tomorrow).

A Comment on this weeks TWIP

As I noted last week, today is the weekly review of petroleum from the "This Week in Petroleum" (TWIP) at the EIA. There is not a lot that is of special concern this week. As I noted in my post yesterday, we are at the point where demand should start to kick up a little as we go from the relatively quiet period at the start of the year into the ramp up to the summer driving season. Normally we would also be starting to see a little easing off in the weather, with warmer days reducing the demands for heating. (And in that regard it has rained so much that it is hard to wade over to the wood pile for logs, and so the current warm spell is appreciated).

The EIA comments on the data are focused more on the heating oil aspect of the situation, explaining why the cold spell has not been reflected in a change in retail prices.

Two factors may offer an explanation for the smaller decline in retail heating prices. The first is the relative strength of the global distillate market. Distillate fuel includes both heating oil and diesel. In the United States, heating oil makes up a relatively small portion of the domestic distillate market while diesel fuel makes up most of the remainder. This is true for much of the rest of the world. Until fairly recently, distillate prices have shown surprising strength compared to other petroleum products due to strong global demand for distillate. As a result, distillate prices did not fall as much as crude oil prices.

The second factor may be related to events of the past summer. The summer is when heating oil customers are typically offered contracts to lock-in prices for the upcoming winter. The price for residential heating oil reached its historic peak last July, averaging $4.53 per gallon. Some heating oil customers may have been anxious about those unusually high prices and wanted to shield themselves from possibly higher prices in the winter. When a customer locks in a contract with a heating oil company, the company often enters into a similar contract with a wholesaler, guaranteeing they will be able to supply that customer with enough heating oil for the winter at a stable price. (This type of commitment is even required by law in Connecticut.) Moreover, many heating oil companies buy some of their heating oil in the off-season to ensure an adequate supply for the winter, regardless of any pre-arrangement with their customers. So another reason heating oil prices this winter have not fallen as quickly as crude may be that some of the volume heating oil dealers (and customers) bought earlier was quite expensive. Thus, a portion of this additional expense may have been passed on to the customer during this heating season.

A clear bottom seems to be developing for crude prices both in the spot price
And contract markets

(Source EIA)

But with domestic production rising above last year, and imports remaining at last years level, domestic stocks continue to rise. In January the Strategic Petroleum Reserve added another 0.7 million barrels as part of the Royalty in Kind program (RIK), though some of these stocks may be exchanged later in the year . There was, however, a slight downtick in the amount going to refineries. Over on the gasoline page this resulted in a drop in gasoline produced, relative to last year, even though demand was seen as having returned to last years level. Imports remain below last year, though they are climbing, and the combination led to a reduction in the gas in storage, though it has returned to near the middle of the five-year range. This may well, in part, be what is reflected in the pickup in gasoline prices.

Looking at the distillate plots, demand is still below last year, though sneaking upwards, while production is still a little ahead of last year. The net result is that stocks remain above the 5-year average, which may be in part why (as the quote above notes) prices have remained relatively stable.



(Source EIA)

It will take a little while to see if the normal changes in demand still occur this year.