December 8, 2010
(Next Release on December 15, 2010)

Weak U.S. Oil Demand?

In analyzing the outlook for oil prices, soft U.S. oil market conditions are sometimes cited as capping price pressures. Unlike regions outside the United States, including other Organization for Economic Cooperation and Development (OECD) areas, U.S. inventories are still high, despite recent declines, and oil demand is characterized, by some, as remaining weak.

Recent data can shed some light on the state of U.S. demand. With sharp inventory declines over the last several months, both gasoline and distillate stocks are now below year-ago levels. The degree to which reported inventory levels exceed typical or 5-year average levels has dropped to about 10 million barrels for gasoline, after running close to 29 million barrels at its peak in mid-September. Likewise, the deviation above typical distillate inventory levels has shrunk to 22 million barrels, down from close to 38 million barrels at its peak in August.

While low refinery utilization rates stemming from outages and fall maintenance have combined with low light product imports to limit gasoline and distillate supplies, stronger than expected demand growth may also have played a role in shrinking product stock cushions. The figure below shows U.S. total oil demand year-over-year growth, as well as gasoline and distillate demand growth, over the January 2009 through September 2010 period. As illustrated, total demand growth turned positive in February 2010, after running at large, albeit shrinking, negative rates throughout much of 2009. Since February, demand growth has accelerated, reaching a peak in September of slightly over 900,000 barrels per day, or almost 5 percent compared with September 2009, according to the latest available data from the Energy Information Administration’s (EIA) Petroleum Supply Monthly.

A portion of the surprisingly strong growth rates seen this year can undoubtedly be attributed to the relatively low demand levels seen last year, especially over the first half of 2009 when economic activity was exceptionally weak. Distillate demand growth accounted for a third or more of all third quarter growth in product demand. With gasoline also lending solid support, transportation fuels, in general, appear to be driving total demand growth at a very strong pace. Even including the 500,000 barrel per day decline seen in January, total demand growth through September is running at just under 400,000 barrels per day. Excluding January, to better evaluate the trend since turning upward, U.S. total demand over the February through September period is growing at an even stronger pace, slightly over 500,000 barrels per day on average, or about 3 percent.

While much has been written on tightening world oil market balances, driven in part by strong emerging market demand growth, especially in China, recently improving conditions and strengthening oil demand throughout the OECD, led by the United States, have been less noted. Yet, U.S. year-over-year growth of almost 750,000 to over 900,000 barrels per day in August and September is of an order approaching, or even exceeding, growth levels seen in China. When the swing from huge declines last year to large third quarter growth levels observed this year is taken into account, the U.S. contribution to tightening global balances is considerable. Nevertheless, even given strong growth this year, U.S. oil demand remains well below peak levels seen in 2005, and recent growth rates relative to year-ago levels are not expected to continue, as the effect of low starting points (from the depths of the economic downturn) for such calculations becomes less important.

Gasoline Price Shoots Up a Dime
The U.S. average retail price for a gallon of gasoline shot up 10 cents from last week to $2.96 per gallon, the highest average since October 2008 and $0.32 per gallon above last year at this time. This was the largest one week increase since May 2009. The biggest increases were seen in the Midwest and on the Gulf Coast; in both regions the price surged to over 13 cents higher than the previous week. The East Coast saw prices gain about nine cents, while on the West Coast the average was up six cents. The Rocky Mountain region was the laggard for the week with the price gaining only half of a cent.

Diesel prices also increased but in a more tempered fashion, as the average retail diesel price rose three and a half cents. The national average for a gallon of diesel is now $3.20 per gallon, $0.43 higher than last year at this time. Prices on the Gulf Coast grew more than a nickel, the biggest increase in the country. However, Gulf Coast prices remain the lowest in the country at $3.13 per gallon. Prices on the East Coast registered a four-cent gain, while Midwest prices increased more than three cents. The West Coast saw the diesel price increase two cents, while the average in the Rocky Mountains was up less than a penny.

Residential Heating Fuel Prices Jump
Residential heating oil prices increased during the period ending December 6, 2010. The average residential heating oil price jumped by approximately $0.09 per gallon last week to reach $3.20 per gallon, an increase of $0.44 per gallon from the same time last year. Wholesale heating oil prices increased by nearly $0.14 per gallon last week, reaching a price just shy of $2.55 per gallon. This is $0.48 per gallon higher than last year’s price.

The average residential propane price increased by $0.02 per gallon to reach $2.60 per gallon. This was an increase of $0.26 per gallon compared to the $2.34 per gallon average from the same period last year. Wholesale propane prices increased by less than $0.01 per gallon to $1.32 per gallon. This was an increase of $0.03 per gallon when compared to the December 7, 2009 price of $1.28 per gallon.

Large Decline Experienced in Propane Inventories
After a counter-seasonal build last week, stocks of propane felt a steep drop this week as total U.S. inventories fell by 2.3 million barrels to end at 63.1 million barrels. The Midwest region felt the brunt of the fall, drawing 1.7 million barrels of stocks. The Gulf Coast regional inventories drew 1.0 million barrels and the Rocky Mountain/West Coast region was down 0.1 million barrels. The East Coast regional inventories gained 0.6 million barrels of propane stocks. Propylene non-fuel use inventories represented 2.9 percent of total propane inventories.

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