OPEC Upgrades Demand Estimate

Jim Brown
Printer Friendly Version

In their monthly estimate OPEC increased the expected demand for crude in 2014 by +40,000 bpd to push WTI over $101 at the open. Excitement faded by the close.

An increase of 40,000 bpd is a drop in the proverbial bucket when global demand is over 90.0 million barrels per day. However, a journey of 100 miles begins with the first step so any demand growth upgrade is a positive factor. However, since this is a monthly report it tends to fluctuate up or down every month.

While the OPEC announcement helped push prices higher the +3.3 million barrel build in crude inventories helped push prices lower by the close. A large increase was expected because we are in the inventory building cycle that lasts until mid June. U.S. production rose slightly to 8.13 mbpd and imports rose +1.04 mbpd from 6.89 mbpd to 7.93 mbpd. That 7.28 million barrel increase for the week accounted for the inventory gain. Cushing inventories declined almost -3 million barrels to 37.6 million and the lowest level in three months. This was probably due to slowing inflows due to the cold weather and increased outflows to the Gulf now that the new pipeline is in full operation.

Gasoline inventories declined -1.7 million barrels and the biggest decline in more than two months. Demand of 8.33 mbpd was the lowest in three weeks. The current winter storm heading up the eastern coast will depress gasoline demand but winter is almost over and the spring demand cycle will begin.

Distillates declined by -700,000 barrels and the fifth weekly decline. Distillate demand is also going to be impacted by the massive number of flights being cancelled because of the storm. Jet fuel and diesel demand should decline but heating oil will increase. However, it is late in the heating oil season and consumers will be hesitant to top off their tanks at the current high prices at $4.24 per gallon.

Distillate stocks are very low for this time of year at -10.2% below year ago levels and well below the five year average. At 113.1 million barrels they are nearing the four-year low of 110.9 million barrels set back on November 22nd. Refiners are not producing distillates at the pace necessary to build inventories. This is strange because diesel prices are high with the national average at $4 per gallon. It would appear they are exporting it with refined product exports at 3.66 mbpd last week.

Exports last week

Gasoline 586,000 bpd
Jet fuel 156,000 bpd
Distillate fuel oil 1,296,000 bpd
Residual fuel oil 372,000 bpd
Propane/Propylene 376,000 bpd
Other products 875,000 bpd

If they can export it for a higher price than they are getting in the USA then it makes sense for them to do so. That forces prices higher in the U.S. and consumers pay more at the pump.

Natural gas prices rebounded intraday to $5 but faded into the close ahead of Thursday's inventory report. The new winter storm will cause additional demand but we won't see that impact on inventories until next week. The inventory draw we will see in Thursday's report is for last week and some areas of the country had warmed up slightly so the inventory decline should be less.

Propane inventories declined -2.9 million barrels to 27.9 million. That reduced the days of supply to 17.5 and well below the year ago level at 29.5 days. Propane demand declined in the week ended 1/31 to 1.308 mbpd but spiked last week to 1.684 mbpd. Prices dipped slightly as a result of that decline in demand but will likely rebound this week. The national average is now $3.757 per gallon, down from $4.01 two weeks ago. Prices in the Midwest were over $4.20 per gallon.

The EIA published a new table of average initial production from new wells. I did not have this when I wrote the article over the weekend discussing the small increase in production compared to the number of wells being drilled.

If you remember the weekend article we are drilling just over 9,000 wells per quarter of which 75% are oil wells. According to the EIA the average initial production for the top six shale fields is 250 bpd. If we take out the Haynesville and Marcellus, which are primarily gas fields, we get an average of 336 bpd.

That means the roughly 6,800 oil wells drilled each quarter produce about 2.284 mbpd of new production. If those wells continued to produce at that rate we would be swimming in oil. As I pointed out in that prior article we only increased TOTAL production in Q4 by +260,000 bpd in Q4 and +517,000 bpd in Q3. Read prior article

Let's focus on the bare facts.

6,800 wells produced 2.284 million barrels per day of new production in Q4

Total production only increased +260,000 bpd.

This means the total decline in new and existing wells was roughly 2.024 mbpd for the quarter.

We are running as fast as we can to punch new wells but the instant new wells begin to slow the total U.S. production is going to drop like a rock.

I hate to keep repeating the same story over and over but I am still getting emails from readers that can't comprehend the magnitude of the story. The press keeps preaching the energy independence headline but they failed to do the math. I will produce some more links in the weekend commentary to substantiate the data.


The markets moved even higher on Yellen's testimony but failed the Dow and S&P failed to post gains today. The Nasdaq did more higher thanks to the biotechs and pharmaceutical stocks. Priceline was the big gainer.

The challenge for Thursday will be another round of Yellen testimony to the Senate. The prepared comments are required by law to be exactly the same but the Q&A will be different. They will press her again on what would cause the Fed to taper the taper and she will again respond it is data dependent. However, there is always the possibility for some comment to slip and tank the market. The upside is already baked in so the risk is to the downside.

Jim Brown

Send Jim an email