What Drop in Demand?
Yesterday (Tuesday), the EIA released its latest Short Term Energy Outlook (STEO) which includes forecasts of demand, supply, and prices up to December 2012. The big picture number comes to WTI prices averaging $91.00 in September 2011, and averaging $101.00 in 2012, down from $108.00 in the previous month’s report. Just last week these numbers would have seemed unfeasibly low, but WTI hit a low print of $75.71 in electronic trading yesterday and settled at $79.30, could the EIA’s numbers be too high?
The general market consensus is that recent weakness has not been due to an imbalance in supply, but rather weaker demand forecasts. Indeed, yesterday OPEC also released its monthly report in which the demand growth forecast for 2011 was revised to 1.21 MMbbls/d, 150 Mbbls/d lower than the previous month’s report.
Yet the EIA does not seem to agree. In fact, as illustrated in today’s issue of The Schork Report, global liquid fuels consumption in 2012 was revised to 89.825 MMbbls/d as compared to the 89.739 MMbbls/d seen in July’s report, thanks to a 0.176 MMbbl/d increase in demand out of China. Admittedly, U.S. consumption was revised lower from 19.316 MMbbls/d to 19.194 MMbbls/d, but U.S. consumption of crude oil has likely peaked well before the commodity bubble came along, thus we are not too concerned.
As for the end consumer, the retail price of gasoline is expected to average $3.520 in 2011 and $3.640 in 2012, as compared to $3.610 and $3.700 in the July report, respectively. These values remain high given increasing forecast gasoline margins at refineries, from $0.34 per gallon in 2010 to $0.48 per gallon in 2011, as evidenced by the RBOB crack currently trading at $33.00, the highest level ever recorded for this timestep and 307.75% (!) above last year.
Refineries are booking higher profits due in part to higher efficiencies, but also due to refined product inventories moving close to their seasonal norms. Consider that as of last week’s DOE report, total motor gasoline inventories stood just 1.07% above the preceding five year average, as compared to the 5.51% surplus in crude oil storage.
Even this crude oil surplus, as illustrated in today’s issue of The Schork Report, is an improvement to the 6.16% surplus seen at the start of the year and the 8.19% surplus at the end of May.
Given firm demand and tightening prices, how does the EIA justify the drop in prices? Frankly, it doesn’t. According to the STEO, the EIA “expects oil markets to tighten as growing liquid fuels demand in emerging economies continues to outpace supply growth with continuing upward pressure on oil prices”.
Consider that OPEC production is expected to increase by a small 0.94 MMbbls/d between 2011 and 2012, while surplus capacity in 2011 stands 16.07% below 2012 and OECD commercial oil stocks days of supply are expected to average 56 in 2012 as compared to 59 in 2010 and 60 in 2009.
This month’s STEO is also noticeable in that the effects of the SPR releasing 31 MMbbls of crude oil are filtering their way into the analysis, but regardless of the injection, domestic crude oil inventories (which stood 21 MMbbls above the preceding five year average in July) are expected to return to the five year average by the end of 2012.
Put simply, the EIA’s price forecasts depend heavily on market action over a short span of time. For the August report, that meant prices for the five trading days ended August 4th, a timespan over which WTI sold off by 9.48% to 86.63. This is pushing the EIA’s price forecasts lower, yet analysts at The Schork Report are advising clients that latest STEO strikes us as bullish in the long run.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.