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The Gasoline Glut Is Almost Gone


Friday July 21, 2016

In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.

Let’s take a look.

1. Gasoline inventories back in long-run average

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- U.S. gasoline stocks spiked in early 2016, one factor that led to the precipitous decline in prices.
- Stocks have remained mostly elevated since then, but more recently, strong drawdowns have erased the excess.
- Over the past three weeks, gasoline stocks have plunged by nearly 10 million barrels, putting current stocks not just back into the five-year average, but close to the 10-year average.
- Gasoline inventories now stand at roughly 231 million barrels, or about 24 days’ worth of supply.
- Much of the recent drawdowns can be attributed to a surge in exports to Latin America, while imports have also dipped.
- Combined with the recent drawdown in crude oil inventories, the more balanced gasoline supply situation is creating a sense of a tightening market. It is no coincidence that Brent hit $50 per barrel on Thursday for the first time since early June.

2. Clean energy performing better than coal and even S&P

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- The WilderHill Clean Energy Index, an index of 40 publicly-traded solar and wind companies, is up 20 percent so far this year, far outpacing a leading coal index, despite supportive U.S. government policy.
- The clean energy index is also up more than double the broader S&P 500, which has gained 9.8 percent.
- U.S. investment into clean energy hit $14.7 billion between April and June, a surge of 51 percent quarter-on-quarter, according to Bloomberg New Energy Finance.
- “We are seeing catalysts for these markets driven by the fact that people increasingly realize clean energy is more profitable than conventional energy,” David Richardson, an executive director at Impax Asset Management, told Bloomberg.

3. Flat inventories this year, growth in 2018

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The EIA forecasts WTI will average $49 per barrel in 2017 and $51 in 2018.
- The agency said in its latest monthly report that the upside to prices could be limited because shale companies have locked in future production already, offering some level of certainty that more oil will be produced.
- Inventories will be relatively unchanged in the second half of 2017, despite OPEC’s best efforts.
- That puts a lot of stress on the OPEC deal, which is set to expire in 2018. The group has aimed to bring down oil inventories to average levels, a feat that will be difficult to pull off.
- The EIA says inventories will grow by an average of 0.2 million barrels per day in 2018, although that assumes no extension of the OPEC agreement beyond the first quarter of next year.

4. American crude becomes competitive in Asia

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- Due to the OPEC cuts, the supply of medium-grade sulfurous sour crude – the type that comes from much of the Middle East – is in shorter supply. The Dubai benchmark, as a result, has climbed against the American benchmark, WTI.
- WTI is now trading at a discount of as much as $1.42 per barrel relative to Dubai.
- As a result, some Indian refiners have actually opted to buy American oil as opposed to crude from the Middle East, despite the much greater distance to travel.
- The purchases have been small for now, with Indian refiners testing the quality of the oil coming from the U.S. Gulf of Mexico. But the shipments highlight the complex dilemma for OPEC as it tries to balance the global oil market – it risks losing market share in what is essentially its backyard.

5. Peak gas demand?

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- The IEA said in a recent report that the global market for natural gas is undergoing a radical transformation, with sharp growth in U.S. supply, a growing and more open LNG market, and increased consumer demand due to more options.
- The oil majors, to a large degree, have bet their future on natural gas. Royal Dutch Shell (NYSE: RDS.A) recently purchased BG Group for $50 billion with an eye on the long-term for natural gas.
- However, while natural gas has often been billed as a bridge fuel to a renewable future, renewable energy is increasingly competitive today.
- Bloomberg New Energy Finance predicts that natural gas will see its market share in the electric power sector erode over time, falling from 23 percent last year to just 16 percent by 2040.
- As soon as 2031, global gas-fired power capacity will start to decline.
- The upshot is that the renewable future could be here sooner than the oil majors previously thought.

6. China’s gasoline demand flat for third year

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- China’s state-owned China Petroleum & Chemical Corp (or Sinopec), the world’s largest oil refiner, said that it will cut refinery runs by 240,000 bpd over the three-month period between June and August because of weaker demand and competition from privately-run Chinese refiners.
- While the market has paid a lot of attention to OPEC and global supply, consumption rates have received less attention. “It’s time to look over to the demand side. And on that front, with China’s fuel demand weakening, it basically means oil may stay lower for longer,” Gao Jian, an analyst with Shandong-based industry researcher SCI99, told Bloomberg.
- All told, China’s gasoline demand is still growing, but at a sharply lower rate than in years past. In 2017, demand growth is estimated at 95,000 bpd, according to the IEA, less than half of the 230,000-290,000 bpd growth rate of the previous two years.
- Soft Chinese demand is hitting the oil market hard.

7. Saudi inventories show balancing oil market

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- Saudi crude oil stocks have been falling for a lot longer than in the U.S.
- Saudi Arabia’s oil inventories peaked in October 2015 at 329.4 million barrels, and have since declined sharply. In May, inventories stood at 258.8 million barrels, the lowest level since January 2012.
- The severe decline in inventories suggests that the oil market has been tightening for quite a while, even though data elsewhere – particularly in the U.S. – indicate otherwise.
- This will sink in to the broader oil market later this year and into 2018, putting upward pressure on crude prices.

That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.

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