Liquid Lunge

These Aren't the Oil Barrels You're Looking For

A headline surge in U.S consumption obscures flagging gasoline demand.

BAGHDAD, IRAQ: A worker at the Dura oil refinery, on the southern outskirts of Baghdad, fills a barrel 26 January 2004. Iraq's former dictator Saddam Hussein rewarded 200 of his leading supporters abroad by giving them millions of barrels of crude oil, government officials said 25 January. Oil ministry undersecretary Abdul Sahib Salman Qotob told AFP the supporters included at least two prime ministers and two foreign ministers, as well as high profile politicians and political parties. Journalists and the sons of ministers and heads of states across four continents were also among recipients. AFP PHOTO/Karim SAHIB (Photo credit should read KARIM SAHIB/AFP/Getty Images) Photographer: KARIM SAHIB/AFP

It’s official: U.S. oil demand increased almost half-a-million barrels a day in February. Except, on the other hand, it didn’t quite do that.

The Energy Information Administration just released its monthly estimates of U.S. oil supply and demand, which come with a time-lag. They show consumption of 19.62 million barrels a day in February, up 460,000 barrels from February 2017. If you’re an oil bull, 2.4 percent growth in the biggest market on the planet is pretty encouraging.

But “oil” covers a multitude of liquids. And beneath that headline number lies another, less encouraging one.

Demand for “finished petroleum products” – gasoline, diesel, and the other useful stuff into which crude oil gets refined – fell by 189,000 barrels a day, or 1.1 percent. So what was the other 649,000 barrels a day that pushed up demand overall?

Two-thirds of it was “hydrocarbon gas liquids”; mostly natural gas liquids such as ethane and propane. As liquids, they’re lumped in with oil. But they are lower-value products related mostly to the petrochemical business and accounted for just 13 percent of overall “oil” demand in the 12 months through February.

Trompe-l'oeil

Most of February's growth in U.S. oil demand was really for natural gas liquids

Source: Energy Information Administration

Note: Monthly change in product supplied in the U.S., year over year.

That means underlying demand in the bulk of the U.S. oil market actually fell in February. To be clear, this is just one month’s reading, and demand growth for petroleum products (and natural gas liquids) was strong in January.

But it’s a concern because it brings us back to prices.

Gasoline accounted for 89 percent of the net drop in demand for refined products in February. As I wrote here, while interested parties such as Saudi Arabia may dream of $100 oil, it would put further pressure on consumers. Average U.S. gasoline prices have risen from around $2.15 a gallon when OPEC, Russia and others announced supply cuts back in November 2016, to about $2.85 today. All else equal, every $10 on top of the price of a barrel of crude oil adds another 24 cents at the pump.

Looked at on a rolling 12-month basis, it is clear the recovery in U.S. gasoline demand that was turbo-charged by the collapse in oil prices has stalled out – and rising prices have surely played a part in that:

How Markets Work

The recovery in U.S. gasoline demand has flattened out since late 2016, coinciding with a renewed increase in pump prices

Source: Energy Information Administration, Bloomberg

Besides the obvious impact higher oil prices are having on U.S. supply growth, their impact on demand is the slower-burning but equally important factor here.

It is perhaps no accident that, at a time when hedge funds’ net position in crude oil is extraordinarily long, much of the market seems consumed with the issue of supply shocks, with Iran the current center of attention. Tail events can make for big rewards. What the demand numbers are warning, however, is that even the anticipation of those tail events also has real consequences for oil’s fundamentals.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Liam Denning in New York at ldenning1@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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