Musings: Early Signs of Petroleum Demand Revival in U.S.

Crude oil prices had a good week last week, closing up $5.82 to $44.76 a barrel on the futures market. This rise amounted to a healthy 14.95% increase, although oil prices had actually advanced higher during the week, but fell on Friday when both the details of the Obama administration's budget impact on the energy industry became clear and the nation's GDP estimate for the fourth quarter was revised sharply lower.

For the week, the oil price rise was driven by a number of factors -- surprising strength in domestic oil inventory data, a positive report about OPEC's cutback compliance and signs that oil demand is rising. When the U.S. Department of Energy reported its weekly oil inventory data last Wednesday, crude oil inventories only rose by 717,000 barrels, about half the 1.2 million barrel rise anticipated by analysts. Gasoline inventory fell by a surprising 3.3 million barrels, although refinery capacity utilization was down reflecting industry efforts to take advantage of weak petroleum demand to undertake refinery turnaround operations early.

Another positive was the report from Petrologistics, a tanker tracking company, suggesting that OPEC members were achieving about an 89% compliance with the cartel's December 2.2 million barrel a day production cutback. At the same time, Dubai announced it was reducing further the amount of oil it will supply to refiners in Asia in March, which has revived hope that OPEC may be positioning to institute another production quota cutback at the body's March 15 meeting.


Last week was the third weekly decline in oil imports, which suggests that OPEC's production cutback is working. Some analysts have speculated that oil is flowing to other markets around the world as the U.S. is awash in crude oil, at least at Cushing, Oklahoma. If Petrologistics is right, and we have no reason to believe they are way off in their estimate, then one should expect a decline in imports to the world's largest oil consuming and importing market.


What may be more important for the oil market is that weekly demand has begun to show signs of improving. This is noted in the chart of the 4-week average for petroleum product supplied over the period from 2005 through now. Over that period the trendline has been down. Starting last fall when the credit crisis exploded, petroleum product supplied fell sharply but then began a recovery back to the trendline at the start of 2009. Demand then fell off but has since moved up closer to the trendline. Whether the weekly petroleum supplied volume rises above the trendline is unknown, but the fact it has recovered from the credit-crisis induced low last fall is encouraging.

Gasoline supplied, which is a measure of demand, has also bounced off its credit crisis low, even though it has recently retested that low. As shown by the chart in Exhibit 3, gasoline supplied has been much more volatile over the 2005-2009 period, but again, we are encouraged by the fact that although the recent low demand was lower than experienced twice in 2005, demand has not gone lower in the recent dip at a time when unemployment has been soaring and the economy has apparently dropped into an abyss.


The latest highway travel data shows that although December's monthly vehicle miles driven of 237.2 billion is down by 3.8 billion vehicle miles, a decline of 1.6% from the prior year, the rolling 12- monthly total has shown a slight uptick. Quite possibly this mileage increase is related to the dramatic decline in gasoline pump prices, but offsetting that positive one would have to factor in the impact of the dramatic economic and employment deterioration, which should negatively have impacted consumer spending and driving habits in the month. To the contrary, the Federal Highway Administration's release of the December data pointed out that 17 states showed increases in vehicle miles driven that month, the first time since August 2007. For all of 2008, vehicle miles driven fell by 3.6%.


All the latest oil supplied and consumption figures suggest that domestic demand is recovering somewhat. We recognize that the upticks in oil use and the downticks in imports are small, and in some cases represent repeats of moves of earlier weeks, but they come in a period when the domestic economy is acknowledged to be experiencing one of its worst contractions since the Great Depression. In the face of that weakness, any oil demand improvement should be noted. Hopefully, these improvements are like green shoots through a winter blanket of residual snow.

Parks Paton Hoepel & Brown
Reprinted with permission from PPH & B

G. Allen Brooks works as the Managing Director at PPHB LP. Reprinted with permission of PPHB.


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Generated by readers, the comments included herein do not reflect the views and opinions of Rigzone. All comments are subject to editorial review. Off-topic, inappropriate or insulting comments will be removed.
Scott Montgomery | Mar. 6, 2009
So the taxes come. Oil companies, just add it to the cost of goods sold, pass it on, and keep drilling! If we don't have enough storage capacity, get some of that Democrat stimulus money and build more capacity! Surely we don't have more than a few months usage stored. We're gonna use it up in the relative short term, so let's keep the domestic industry going. All this minute by minute reaction that keeps everyone's gut in knots worrying about their next paycheck makes me sick. Somebody start managing this thing! Get on it!

Mike Billings | Mar. 6, 2009
Now you're talking Carl!

Mike Shortnacy | Mar. 4, 2009
Carl and Ted you are right, they ALL need to go. We need people in there that can remember that they work for us.

Ted Abshire | Mar. 4, 2009
Reply to Carl Ritchie -- great minds think alike. I agree with your entire statement.

Leonard Plaunty | Mar. 4, 2009
I think the American people are making and made a grave mistake by letting a democrat in office. This nation was founded on people working hard for everything they wanted or needed to make their lives better and more meaningful. We as the people of this great nation can not allow the government to control our lives or our property. If we made financial mistakes, then we have just suck it up and move on. Never spend more than you can earn. If you do spend more than you earn than you deserve to be in the position where you are. And if your company fails to make a profit than you don't get the bonus.

Carl Ritchie | Mar. 4, 2009
I think the USA should stop buying overseas oil and focus on the USA, Alaska and the North American Continent. We should convert 50% of all vehicles to natural gas since we have so much of that and move forward without the overseas buying. Build a wall to stop Mexico from crossing our borders today! Kick out everyone from congress and put some good old country mayors in the big houses.

LP | Mar. 3, 2009
I believe that there are so many articles on the O&G market that it could confuse even the highest intelligent form of life on this earth. Should we believe that we are going to get up and going or that the O&G glory days have suffered yet another 80s crash and burn? For the families of the O&G industry workers, it's a living hell every 5-10yrs. For the American people its a living hell 100% of the time.

Lou Calabria | Mar. 3, 2009
Your charts illustrate that the tide may be turning in our favor. As a producer, it has been hard to comprehend the magnitude of the decline in crude prices.

Christian LaCasse | Mar. 3, 2009
I think the conclusions drawn in this article are not properly substantiated nor are they accurate. The depth and breadth of the U.S. economic recession continue to increase without an end in sight, all metrics from ship and truck tonnage to commercial retail space occupancy are falling off a cliff, and there are oil tankers parked out in the Gulf of Mexico with their holds filled to the brim, unable to offload their cargo.

The author notes that the recent shifts in imports from the overall downward trend are small. More time and research are necessary before any valuable conclusions can be drawn for U.S. petroleum demand recovery.

John Ashmun | Mar. 3, 2009
Good news to have this bit of encouragement, which is not unexpected.

Benjamin Cole | Mar. 3, 2009
I don't think oil demand is going to revive in the United States. The economy looks sick. The global economy looks sick. Add to that, we have the globally embedded conservation measures undertaken in the window of higher oil prices (2004-2008). Even a 75 percent cut in the price of oil is doing nothing to stimulate oil demand. Get used to it. Oil is headed to $10 a barrel. Once there, the oil sector will be an interesting play. Until then, investors will get burned if the go long on oil or buy oil stocks.


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