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DIGITAL EDITION
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THIS WEEK'S TOPIC:
CRUDE
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A look at the demand for crude products
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On Friday, the International Energy Agency (IEA) lowered its estimate for growth in global demand for crude. It believes that next year the world will consume 1.2 million barrels per day (bpd) more crude than it did this year. Its previous estimate was for growth in demand of 1.4 million bpd.
The IEA is concerned about demand from Europe and Asia. In Europe, the worry is that Greece is going to drop out of the Eurozone, and that is going to cause a loss of confidence in the euro, which will have a negative effect on economic activity. On Friday, the Greek government proposed austerity measures that were remarkably similar to the proposal its creditors made and the government urged its voters to reject. It was unclear, going into the weekend, if the proposal would be accepted, but it is certainly in the best interest of the International Monetary Fund, the European Union and the European Central Bank to see that Greece remains in the Eurozone.
A key driver in crude’s recent fall was the collapse of the Chinese stock market. The Chinese government has been frantically trying different measures to prevent a total collapse of stock values. China is the world’s second largest consumer of crude, so any decline in economic activity could have a significant impact on global demand. By week’s end, the stimulus measures from the Chinese government had halted the collapse of its stock market, but its economy is still not out of the woods just yet. The possibility of a continued slowdown in economic activity, and thus the potential decrease in crude consumption, is very real.
Demand from the United States looks strong. It does not look like any weakness in crude prices later this year or next is going to come from a lack of demand in the United States.
The Energy Information Administration (EIA) reported that the United States had consumed an average of 9.5 million bpd of gasoline over the past four weeks. That was 480,000 bpd higher than the same period last year and 250,000 bpd above the five-year average for that period. U.S. refineries are consuming a near-record 16.5 million bpd of crude, about a million bpd more than the same time last year.
Indeed, total U.S. consumption of petroleum products is approaching pre-recession levels, with low prices stimulating demand.
The chart above shows total petroleum products supplied (TPPS) in the United States. That is just about anything made from a barrel of oil. It is a good indicator of overall energy demand as it takes out some of the seasonality of individual products.
One of the justifications for pushing crude prices higher recently, even though supplies were generally high, was the expectation for increased demand. Those justifications were not off base. TPPS is up this year over last year.
Average daily demand this year has been 19.551 million bpd. That is up from 18.739 million barrels per day through the same period last year. It is also higher than the five-year average of 18.862 million bpd year-to-date.
At 19.5 million bpd, TPPS is not quite back to pre-recession levels, but it is very close, somewhere around a half-million bpd short.
If things calm down in Asia and Europe, restoring investor confidence and boosting economic activity, global crude demand and thus supplies could tighten significantly given the high demand in the United States. That would certainly be bullish for crude prices, and as a consequence, supportive of higher propane prices.
None of us in the propane business wants to be economists, but keeping abreast of the situations in Asia and Europe has got to be a part of our propane supply buying decisions. If things fall apart in Europe and Asia, we would likely be less aggressive buyers of propane, assuming no bullish counter develops with propane fundamentals. But if Europe and Asia stabilize and join the United States in support of higher demand for crude, we might become more proactive buyers of supply.
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WEEK IN REVIEW
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Propane prices fell sharply to begin last week, but managed to recover the loss by week’s end, despite a larger-than-normal build in propane inventory.
Crude prices fell, and could recover with much uncertainty in commodities, equities and financial markets.
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LAST WEEK'S HIGHLIGHTS
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Propane and crude prices tumbled to start the week. Factors affecting energy markets included Greek citizens voting over the weekend not to accept the austerity measures needed to get outside aid to keep its government and banking system solvent, China’s stock market continuing to plunge, U.S. oil drilling rig count increasing, and negotiators in the Iran nuclear talks beginning the week upbeat a deal would get done.
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Mont Belvieu propane lost a little more ground, as crude inched lower. Conway was the contrarian, with a solid half-cent gain. It was a volatile day of trade as investors tried to weigh how all the significant factors mentioned above would conclude and affect markets.
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Propane prices moved higher, despite a fall in crude prices and the EIA reporting an above-average build in U.S. propane inventory that pushed them to more than 85.7 million barrels. Surprise builds in crude and gasoline inventory pushed crude lower.
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A runup in crude prices in the early morning was the catalyst for a more substantial runup in propane prices. Both major U.S. hubs gained more than 6 percent in value. It was hard to ascertain where the price pressure was originating, as trading volume was relatively low. Crude was up just over 2 percent.
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Crude and propane markets cooled down. Crude investors seemed very uncertain and cautious going into the weekend, with potential decisions on Greece’s financial fate and the Iran nuclear negotiation pending. Having gotten its upward adjustment in place on Thursday, propane was finding few enthusiastic buyers to close out the week.
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CONNECT
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WHAT IS COST MANAGEMENT SOLUTIONS?
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Cost Management Solutions LLC (CMS) is a firm dedicated to the analysis of the energy markets for the propane marketplace. Since we are not a supplier of propane, you can be assured our focus is to provide an unbiased analysis.
Contact us today to see if you can benefit from having the Energy Price Watchdog working for you.
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