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Is Gasoline Demand Really Slipping?

In a somewhat befuddling scenario,…

Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Oil Prices Head Higher On Positive Demand Outlook

A supportive IEA monthly report has encouraged a Friday rally for black gold, Texas tea. As prices ping around in their current tight trading range, approaching resistance once again, hark, here are five things to consider in oil (...and LPG...and LNG!) markets today:

1) January saw yet another record month for U.S. LPG exports, with January loadings some 50 percent higher than the monthly average of last year (...which were 27 percent higher than 2015 levels). The U.S. has swiftly established itself as a global LPG supply hub in recent years; South Korea is the leading destination, accounting for 14 percent of export loadings, followed by Japan and China. Mexico is in fourth place, accounting for over 9 percent of flows.

While February loadings have not kicked off at the same breakneck speed that January did, there are a number of VLGCs (Very Large Gas Carriers) ballasting to the U.S. Gulf. Should these arrivals be punctual, export loadings will show a return to form next week, kicking around record levels again.

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2) The IEA has just released its monthly Oil Market Report, with the overarching theme being that OPEC / NOPEC is being extremely disciplined in implementing production cuts. (various agencies are all singing from the same hymn sheet). Firm demand at the end of the year (in part influenced by colder weather in Europe) has caused total OECD inventories to drop below 3 billion barrels for the first time in a year.

The goal of OPEC / NOPEC production cuts has seemingly been to normalize inventory levels. Even though this isn't playing out in the U.S. (hark, oil inventories less than 4mn bbls shy of their all-time record, gasoline inventories less than 3mn bbls away), a move back into the five-year range must be heartening for the cartel and its comrades, with the five-year average around 2.7 billion the next (ultimate?) target. That said, the IEA sees this target as unlikely.

Nonetheless, the IEA still expects production from Brazil, Canada and the U.S. to grow by 750,000 bpd, and by 400,000 bpd for total non-OPEC producers, once falling output is taken into account (Mexico, here's lookin' at you, kid).

U.S. shale production is projected to be 520,000 bpd higher by December versus year-ago levels, which seems a wee bit aggressive. (From our projections, prices would need to clamber and hold above $60/bbl for much of the year for this to happen). The agency has also given an upward bump to demand expectations, lifting it by 100,000 bpd for this year to 1.4mn bpd. A fairly price-supportive report on the whole.

3) There has been much chatter this week about the elevated level of U.S. crude imports, given the backdrop of ample supply. We've been fairly vocal in highlighting how OPEC members - and especially those in the Arab Gulf - have been putting their pedal to the metal, ramping up exports ahead of January production cuts.

As pointed out in this article, it takes ~47 days for crude from the Middle East to reach U.S. shores. Hence it makes logical sense that the final wave of December export loadings from the region are now arriving. Our ClipperData below illustrate that arrivals from the three key regions of the Arab Gulf, Latin America and West Africa are up nearly 400,000 bpd in January versus the 2016 average. Related: From Bust To Boom: Why Canada’s Rig Count Increased 50 Percent Last Year

While January Arab Gulf arrivals are up 13 percent versus 2016, West African arrivals are up 22 percent, boosted by a strong rebound in Nigerian barrels to the East Coast. Our ClipperData show that OPEC loadings to the U.S. were down significantly in January, while loadings for Asia remained strong. On this basis, we expect U.S. imports from OPEC to drop off, especially given waning demand amid spring maintenance season and (soon to be) record levels of crude inventories.

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4) While it is generally accepted that Australia is going to surpass Qatar later this decade to become the global leader of LNG exports, this title may well be short-lived, with the prospect of U.S. LNG exports ramping up next decade - especially given the supportive nature of the current U.S. administration.

According to expectations, the U.S. could wrestle the crown of leading supplier away from Australia in the early to mid-2020s as new projects come online. Dominion's Cove Point terminal is expected to join Cheniere's Sabine Pass terminal in exporting LNG this year, while four other projects are currently under construction. Related: Permian Drilling Costs Surge: Are The Days Of Cheap Oilfield Services Over?

In BP's Energy Outlook to 2035 (I know I said I wasn't going to reference it anymore, but I just can't help myself), it projects that global LNG supply will grow at a rate of 1.6 percent per annum over the next twenty years, with the U.S. leading the charge by 2035 with 19 Bcf/d of LNG output, and Australia at a lesser 13 Bcf/d:

5) Finally, oil prices are surging. Let me clarify: olive oil prices are surging. Erratic weather in Spain and Italy has caused Italian olive oil prices to rise by a third since October, Spanish prices to jump by 10 percent.

Combine this with a weakening in the (once) Great British Pound, and olive oil prices in Blighty have reached a seven-year high. Global production has dropped by 8 percent this season, with Italian production projected to drop by as much as 50 percent.

(Click to enlarge)

By Matt Smith

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