US Oil Demand Isn’t Great, There’s No Other Way To Tell

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The EIA reported a full liquids draw today with surprising crude on the bullish side with a draw on the heels of an SPR release of 6 million barrels. The raw draw came on the back of a middle finger a slight increase in throughput from the refinery, but given the operational capacity, we still have maybe 500,000 bpd of throughput to go before reaching the maximum.

But oil prices rose only slightly after the report as US implied demand is weak.

Request

EIA, HFIR

As you can see from the chart above, the chart above represents implied oil demand for gasoline, distillate and jet fuel. We were supposed to see a big upside in Core 3 this week, and instead we only got a small bump. Going forward, each week the data lags another week, suggesting that high oil prices are weighing on the economy.

Now, while this metric isn’t perfect, we should have seen a slight uptick now given the seasonality factors. If by mid-June we are not at least back to 14.5+mb/d for Core 3, we have a real problem on our hands.

This will tell me that 1) oil prices are too high and causing demand to slow and 2) the economy is slowing down.

If this turns out to be the case, we will have to reduce the size of the positions. The economic slowdown will affect all sectors, energy will still survive and prosper, but positioning will have to be reduced. It’s not certain yet, but I want to give you all an idea of ​​what I’m paying attention to.

Request

EIA, HFIR

Request

EIA, HFIR

The same is true for the other demand variables. Heating components drop as expected based on seasonality, so normally things like gasoline and jet fuel start to pick up. So far, gasoline demand in 2022 is still lower than in 2021, which is not a good sign.

Looking at the bigger picture, things remain bullish. For starters, US oil production showed a sharp rise in April before May volumes showed a decline again.

Production

EIA, HFIR

Production

EIA, HFIR

You can see that US oil production is down from its peak. We still have a week of data to finalize for May, but it looks like high level production was not sustainable. US oil production is not growing at the rate we saw in 2017, 2018, or 2019, so that’s a good sign for future supplies.

Storage

EIA, HFIR

Storage

EIA, HFIR

Looking at the total liquids, you can see that the SPR chart shows a downward trend in the broader stocks, while the trade chart shows a flat line in the stocks. SPR will keep trading stocks significantly flat through October. Crude can even see accumulations throughout the summer months if refinery throughput is limited.

However, the broader picture of declining oil inventories is likely to remain the same. We see this in all storage arrays.

Storage

EIA, HFIR

Gasoline

EIA, HFIR

Product

EIA, HFIR

Big 4

EIA, HFIR

American crude

EIA, HFIR

US crude with SPR

EIA, HFIR

From a fundamental perspective, the bullish picture is still crystal clear. We continue to see a deficit oil market, but with demand still not fully recovering, the bullish picture is tainted. By mid-June we need to see a slight uptick in core 3 (gasoline, distillate and jet fuel), if not, then the destruction of oil demand from higher oil prices is real and will limit the rise in oil price.

For now, we see oil prices rising. We need the demand to play the game, and if it doesn’t, we have to change our position.


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Felix J. Dixon