The Wall Street Journal reports this week's movements.
Crude futures held onto earlier gains Wednesday after the U.S. Energy Information Administration reported a big jump in oil inventories along with an improvement in demand.
Light, sweet crude for April delivery recently traded 60 cents, or 0.8%, higher at $80.28 a barrel on the New York Mercantile Exchange. Brent crude on the ICE futures exchange traded 46 cents higher at $78.64 a barrel.
The weekly inventory data from the U.S. Energy Information Administration offered no sign of tightening supplies, with oil inventories up 4 million barrels last week, where analysts had given an average forecast for an increase of 1 million barrels. Fuel stockpiles came in close to expectations, with gasoline stocks up 800,000 barrels and distillate inventories, including heating oil and diesel, down 800,000 barrels.
But the report did show rising demand, up 3% from a year earlier in the four weeks ended Feb. 26. Total products supplied, a proxy for demand, was at its highest since August, rising for a third consecutive week, though gasoline consumption was down slightly.
Allow me to deconstruct this report. Inventories, especially for gasoline, rose unexpectedly. It's hard to figure out why this would be unexpected. But never mind, let's move on.
The justification given for higher prices is that oil demand increased. Let's look at that. The EIA data shows the following for products supplied, a proxy for demand.
| Product Supplied | Current Week | A Year Ago | Percent Change |
|---|---|---|---|
| Finished Motor Gasoline | 8,808 | 8,803 | 0.1 |
| Kerosene-Type Jet Fuel | 1,292 | 1,343 | -3.8 |
| Distillate Fuel Oil | 3,744 | 3,932 | -4.8 |
| Residual Fuel Oil | 678 | 527 | 28.7 |
| Propane/Propylene | 1,420 | 1,302 | 9.1 |
| Other Oils | 3,373 | 2,845 | 18.6 |
| Total Supplies | 19,314 | 18,751 | 3.0 |
First I'll deal with the large increase (+18.6%) in "Other Oils". This category is mostly naptha and natural gas liquids. These liquids are inputs to the petrochemical (plastics) industry. Global demand for these liquids is surging, which is said to be a good thing for the global economy & future oil demand. Of course, it is China driving this market.
A surge in petro-chemical demand and a steeply backwardated naphtha market suggest that, in absence of major external shocks, a cyclical recovery for the broader economy is around the corner.
Historically, demand for naphtha a key input into petrochem processes, has led demand for other petroleum products It should be no different this time.
Shriharsha Pappu, petrochemicals analyst with HSBC said volumes of petrochemicals produced has registered a rise on growing imports from China. "Chinese net imports for petrochemical products registered a 12 percent increase month-over-month in November 2009," he said. "Volumes registered an uptick in January on rising imports from China."
Also see the Financial Times' Plastics explosion for petrochemical prices, where it is reported that Chinese naptha demand rose 75% year-over-year in late 2009. However, China is now tightening credit in a desperate attempt to cool down its overheating economy. The other rise in U.S. oil demand came in winter heating oils (residual fuel oil +27.8%, also propane, +9.1%). In case you didn't notice, this winter has been unusually cold.
OK, what's left? Gasoline demand (flat), jet fuel demand (down) and distillate (diesel) fuel demand (down). In other words, demand for the main products made from refining crude oil, the products that most signal whether economic activity is on the rise in the United States, is flat or down year-over-year.
So, why is oil over $80 per barrel? I have no idea. Looks like more speculator fun to me.
Is oil overpriced? In the short-run, you betcha. Who is taking it in the shorts? That would be YOU.
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