Demand Is Weak, So Why Are Oil Prices Rising?
Crude oil demand in the United States is down to its lowest level since the onset of the global economic recession. A lackluster economic recovery, coupled with cautious consumer sentiment, is keeping demand for petroleum products suppressed. Nevertheless, lingering concerns over geopolitical tensions with Iran has prompted some governments to raise the possibility of releasing strategic petroleum reserves. Fundamentally, it seems, markets are well supplied, though it may be emotional factors driving certain aspects of the energy market.
The American Petroleum Institute, in its report for July, finds that crude oil demand is down to its lowest levels in roughly four years. U.S. petroleum deliveries for July declined to around 18 million barrels per day, the lowest level for the month since 1995 and the lowest overall since the onset of the global economic recession in 2008. Oil production in the United States, however, reached 6.2 million bpd, the highest for any July figure since 1998 and total refinery inputs grew 2.3 percent in July to reach their highest level for the year.
John Felmy, the API's chief economist, said lower consumer demand was in large part a reflection of the lackluster U.S. economic recovery and lingering pessimism in the eurozone.
[More From Oilprice.com: Will BP Loses Its Oil Major Status?]
"While retail sales for July are up and housing has improved, the weak petroleum demand numbers are a strong indication the economy is still faltering," he said.
Outside of the United States, the Joint Organization Data Initiative reports that crude oil production from Saudi Arabia in June reached its highest level in more than 30 years. Crude oil futures began declining last week on talk by some Western governments of a possible release of strategic petroleum reserves. White House spokesman Josh Earnest confirmed that a release from SPR "is an option that is on the table" in Washington.
The last time governments tapped into their strategic reserves in 2011, Libyan oil production was shuttered by civil war. When oil prices hovered about $100 per barrel early this year, however, most of the market was concerned by tensions with Iran more than a physical disruption, as was the case last year.
[More From Oilprice.com: India Looks to the Sun to Prevent Blackouts]
API said much of the decline in oil demand was because of lower gasoline usage in the United States. Refinery closures in California and the U.S. Midwest, coupled with a July oil spill in Wisconsin, pushed retail gasoline prices above the $4 per gallon mark. Consumers react strongly to that benchmark, but with fuel efficiency improving, it may be more of an emotional reaction despite lingering unemployment and personal financial concerns. Nevertheless, with the last U.S. holiday before the Christmas season approaching, political maneuvering may be more of a reflection of public sentiment than a legitimate concern about physical shortages in the energy market. Energy markets, said one analyst, are responding to "just about everything except oil news right now."