Today was rather curious. Oil and gas stocks ramped up prior to the weekly inventory report and held above the two day lows even as crude sold off following the report, which contained its usual mix of bearish and bullish news. In fact, many names in the sector enjoyed a rally back near or above the opening gap up high… a classic sign of a turn around. Continuation tomorrow will confirm this.
The headline number: oil inventory, declined by a smaller than expected 0.9 million barrels. Some traders undoubtedly were looking for a surprise reduction and indeed one firm had called for at least a two million barrel decline on the back of hurricanes Dennis and Cindy. Only a small amount of US production has been shut in by hurricane Emily, although substantially all of Mexico’s Gulf of Mexico production (over a million bbl/d destined for the US) was shut in over Emily and other disruptions in shipping from Venezuela were experienced as a result of the storm. Perhaps that data will filter through next week.
Product Demand Trends
Looking past the headlines, the key issue remains demand. :
- motor gasoline demand continues to be strong (up 2.5%, now 7 weeks of more than 2% increase in product demand);
- distillates and jet fuel demand continue to show demand growth well in excess of the EIA projections for 2005
2005 to date product demand vs 2005 estimates
There does appear to be plenty of product on hand, therefore the only thing holding price up now is demand and perceptions of scarcity of additional supply. There may also be a pull effect from energy sector stocks, many of which will be reporting shortly and few want to be short the sector ahead of what promise to be stellar reports.
Also related to the energy picture, testimony from Federal Reserve Chairman Alan Greenspan:
In recent weeks, spot prices for crude oil and natural gas have been both high and volatile. Prices for far-future delivery of oil and gas have risen even more markedly than spot prices over the past year. Apparently, market participants now see little prospect of appreciable relief from elevated energy prices for years to come. Global demand for energy apparently is expected to remain strong, and market participants are evidencing increased concerns about the potential for supply disruptions in various oil-producing regions.
Since energy utilization and GDP go hand in hand, and Mr. Greenspan and his colleagues continue to forecast fairly robust US (and world wide) GDP expansion this and next year, then Mr. Greenspan is being just a little cute with his injection of doubt on the demand picture (via ”apparently”), although perhaps he’s cautioning market participants to remember what happens when prices rise too high:
Oil demand change vs GDP and Price
Indeed, on a CPI or GDP adjusted basis, the price of crude is getting within striking distance of prices which have historically launched recessions in western economies. With a certain air of Back to the Future we note the current move by the US Congress to extend by two months the period which most of the country switches to Daylight Savings Time – an energy saving measure. The last time this was discussed was… back in the energy crisis days of the late 70’s.
Could this time be different? Perhaps – modern economies are less impacted by oil price fluctuations now than they were 30 years ago, although security of supply is arguably a larger concern than ever.
Developing economies, including many Asian economies, are in a different boat altogether and there are signs of leaks starting to show up.
- South Korea eyes energy conservation, car driving restrictions: The sharp rise in global oil prices, which surpassed the US$60-per-barrel mark Tuesday, is increasing the government’s focus on energy conservation measures.
- To save energy, Japan urges salarymen to shed their suits: The dark business suit, the beloved uniform for generations of salarymen, is supposed to stay at home this summer as all public and private offices – in a bid to save energy and reduce output of global warming gases – are to set their air-conditioners at a sweltering 28 degrees Celsius, or 82.4 degrees Fahrenheit.
- Thailand appeals to people: The government has asked motorists to drive more slowly and has appealed for less air conditioner use.
- China, now the worlds second largest importer of crude, can’t get enough of the stuff:
“Improved living standards” is an all-encompassing reference to consumer goods, but especially air conditioners, which alone account for up to 40% of consumer demand. Perhaps surprisingly, given the group-comes-first qualities of China’s culture and official ideology, there have been few calls for a wholesale voluntary ban on their use; the spirit of ‘Lei Feng’, Mao’s self-sacrificing soldier, does not live on when it comes to air-cons. Some might show more restraint than others, but given the city’s hot, wet summers, the cooler is here to stay, and be used.
Government statistics show the scale of the problem. Power usage in Shanghai has grown dramatically during the past 20 years, from 3,000 megawatts (MW) in 1986 to 15,000 MW last year. Much of this surge was recent; demand increased by 21% between 2002 and 2004 alone. (Asia Times)
Clearly the demand is there, and provided people and governments retain the ability to pay, its likely to accelerate – particularly in less developed economies which will continue to acclerate their energy usage at rates far beyond modern economies until they’ve, essentially, caught up to us.
Unfortunately, the worlds largest economies are not net oil producers but are net oil importers, with China now firmly in this club. Japan imports virutally all of its oil. The US has been a net oil importer since the 1970’s and gets only deeper in energy deficit with every passing year. Finding and delivering supplies increasingly means exploiting resources in less stable areas of the world. Indeed Mr. Greenspan alludes to a possible storm on the horizon:
But, going forward, because of the geographic location of proved reserves, the great majority of the investment required to convert reserves into new crude oil productive capacity will need to be made in countries where foreign investment is currently prohibited or restricted or faces considerable political risk. Moreover, the preponderance of oil and gas revenues of the dominant national oil companies is perceived as necessary to meet the domestic needs of growing populations. These factors have the potential to constrain the ability of producers to expand capacity to keep up with the projected growth of world demand, which has been propelled to an unexpected extent by burgeoning demand in emerging Asia.
Unexpected? I don’t see how this could be so. Emerging economies are merely following in our footsteps.
05.07.20 18:19 #