Will the Price of Oil Rise on Demand for Refined Products?

In a previous article I posted a chart from the International Energy Agency’s recent Essential oil Market Report that shows global demand for refined products catching up to supply by the 3rd 1 / 4 of this year. My opinion is the fact that all of the analysts who are right now blaming the sharp stop by oil prices on a “glut” associated with supply could change their tune quickly as customers adjust to lower fuel expenses. Just as higher costs reduce demand for any commodity, lower costs will increase demand. This is especially true for a commodity that has a immediate impact on standard of living, like oil does. 

When the price of gasoline stepped below $1.00/gallon in 1986, demand for motor fuels and other refined products increased by almost 5% within twelve months. Today, world interest in hydrocarbon based liquid fuels (such as biofuels) is over 92.5 million barrels per day. You can go to the IEA website and see for yourself which normal seasonal demand is expected to push demand over 94.0 million barrels per day within six months. I think both the IEA and our own Power Information Administration (EIA) are blatantly underestimating the price related need increase that is already starting to show up in the data. 

Last week’s EIA report verifies that demand is already surging in the United States. Granted, part of the year-over-year increase in gasoline consumption may be a result of the harsh winter weather we had last year, but I think this tale is going to play out. If fuel prices remain low till this summer, we should see a sharp increase in the number of Americans which decide to take long driving holidays this year. We do love the SUVs. 

Today’s low crude oil prices are blamed on Saudi Arabia’s decision not to reduce supply even though the world is oversupplied by an estimated 1.Five million barrels per day. In the event that gasoline under $2.00/gallon increases global demand for motor fuels by half of the amount it did back in 1986 (2.5%), demand for essential oil will increase by 2.4 million barrels per day and today’s “glut” will soon fade through memory. 

Gasoline prices in Tx are now under $1.75/gallon at numerous discount stations. 

It is going to take some time to work off the build-up in both oil and gasoline inventories, however, if the IEA and EIA start reporting which demand is catching up with give you the NYMEX strip price for oil will adjust quickly. The actual December, 2015 futures contract for WTI crude oil closed at $53.12/bbl on Fri, January 23 ($7.83/bbl above the entrance month contract). By the way, it has a lot to do with why crude oil inventories are building.

Keep in mind that oil production is also going to drop in response to lower prices. The U.S. energetic drilling rig count came by another 43 for the week ending January 23, 2015 to 1,633. Based on the upstream companies’ capital budgets that i am seeing, I expect the actual active rig count to decrease below 1,000 after May. We will soon have less than 700 rigs drilling for oil in this country and that means U.Utes. oil production will be upon decline by the 4th 1 / 4. In the last three years, only the U.S., Canada and Brazil have increased production. The rest of the world’s oil production has been in decline despite previous $100/bbl oil prices.

Even before the sharp decline in oil prices, global interest in oil was growing for a price of 1 million barrels per day per year. In my opinion, within 6 months the rate of demand growth will accelerate to over Two million barrels per day. Demand may go even higher if consumers adjust their driving habits like they did back in 1986.

Increasing Demand For Refined Products Increases Oil Prices is republished along with permission from Oilprice.com