Oil Demand Likely To Surprise To The Upside

• Oil prices have recorded the biggest weekly decline in three months thanks in large part to challenging economic indicators and growing demand concerns.
• Analysts at Standard Chartered point out that the last time that gasoline demand disappointed, a large correction was made afterwards by the EIA.
• Standard Chartered has predicted that global oil markets will record the biggest stock draws in the first half of 2024.

Oil prices have recorded the biggest weekly decline in three months thanks in large part to challenging economic indicators and growing demand concerns. Last week, U.S. crude inventories posted an unexpected rise, with the American Petroleum Institute (API) reporting a build of 4.91 million barrels, a sharp contrast from the anticipated decrease of 1.1 million barrels. This build has come after reports that U.S. crude production surged to 13.15 million barrels per day in February, up from 12.58 million barrels in January, suggesting supply is outpacing demand.

But it’s not just bearish crude oil metrics driving the oil price decline. The EIA has provided an initial estimate that U.S. gasoline demand declined 4.4% Y/Y in April, a negative sign for oil bulls that has triggered a rapid pivot by speculative funds towards the short side of the market. However, commodity analysts at Standard Chartered have argued that the demand pessimism is overblown. According to StanChart, there appears to be a systemic downwards bias in the weekly estimates of U.S. fuel demand, with actual gasoline demand exceeding estimates in 22 of the past 24 months, while distillate demand (mainly diesel) has been revised higher in all of the past 24 months. The analysts point out that last September, the EIA put gasoline demand at 8.014 million barrels per day (mb/d), a stark contrast from the 9.465 mb/d recorded for in September 2022. Across the whole month, the EIA data implied a y/y demand drop of 5.6%, eliciting talks of demand destruction with some experts contending that demand was at its weakest since 1999. However, it later turned out that actual gasoline demand only fell 0.4% Y/Y, far milder than the EIA estimate of a 5.6% decline. StanChart believes the EIA’s estimate for April gasoline demand is too low with actual demand likely to be surprise to the upside.

Related: U.S. Oil, Gas Drillers See Continued Slowdown

Average supply of finished motor gasoline in the United States from January 2022 to March 2024 (in million barrels per day)

Source: Statista

May & June Critical To Oil Fundamentals

Weekly data by the Energy Information Administration (EIA) reveals U.S. crude stockpiles shot up to 7.3 million barrels for the week to April 26, a sharp swing from a draw of 6.4 million barrels posted the previous week marking the highest inventory levels since last June. Adding to the bearish data are expectations that the Fed will keep its benchmark federal-funds rate unchanged at around 5.3% as inflation appears to have reversed course.

However, Standard Chartered has predicted that global oil markets will record the biggest stock draws in the first half of 2024  in May and June, implying we have entered a key period for oil fundamentals that will determine whether the market will tighten further or disappoint. StanChart says to watch global oil demand closely, predicting demand will hit an all-time high of 103.1 mb/d in May and increase further to 103.8 mb/d in June. The analysts have also predicted a y/y demand growth of 1.62 mb/d in May and 1.74 mb/d in June. 

Meanwhile, OPEC+ is set to hold its next ministerial meeting on June 1 in Vienna. StanChart’s model shows that the organization has ample room to increase output by over 1 mb/d in Q3 without negatively impacting global inventories. However, analysts have pointed out that OPEC is unlikely to make any drastic moves when it meets in June because it won’t have full information on whether the expected H1 tightening was fully delivered. Given this backdrop, StanChart sees the global supply deficit exceeding 2 mb/d in August if production stays at current levels, noting the markets are yet to price in the potential deficit.

In contrast to oil markets, natural gas markets have suddenly turned bullish thanks to EU mulling cutting off more Russian gas as well as a late cold snap in Europe forcing EU gas inventories to reverse course. TotalEnergies (NYSE:TTE) CEO Patrick Pouyanne has predicted that natural gas and LNG prices will spike after the EU sanctions Russian gas from the Yamal LNG project. Henry Hub prices are up 4.7% in Friday’s intraday session and have gained 24.4% over the past week to trade at $2.14/MMBtu. However, it’s going to be interesting to see whether these gains will hold considering that experts still expect Europe’s spare storage capacity to become constrained in late summer, although the cold snap has pushed back the timing of the tightness by about three weeks. 

By Alex Kimani for Oilprice.com

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