January Demand Crashed

Jim Brown
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The U.S. demand for crude oil fell -3.8% in January and refined products fell even worse. However there are signs that the economy may be finding some traction.

U.S. demand for crude oil sank sharply in January with distillates, including diesel and heating oil falling -12.2% to 3.578 mbpd. The chief economist for the API said an 11.5% drop in demand for low sulfur diesel is a bad sign for the economy.

The API numbers are at odds with the EIA numbers but that is what makes a market. The API estimate for January for crude oil demand is 18.799 mbpd.

The EIA expects crude oil demand to rise by 1.4 mbpd in 2010 and they are not alone. The IEA, OPEC and Iran have all predicted in the past week up to a 1.4 mbpd increase in demand in 2010.

The API is warning that the drop in distillates is an omen because nearly every consumer product is shipped by train or truck using diesel fuel. If diesel demand is down then the economy is doing poorly according to the API.

On the bright side the EIA has reported increasing demand for gasoline over the last two weeks and that is in spite of the massive storms that blanketed the northeast. I believe the drop in diesel demand was due to the shutdown of the highways by increasingly colder weather and icy roads in late January. The snowstorms in the northeast at the beginning of February have undoubtedly crushed diesel demand again in February.

Since gasoline demand has risen in the last two weeks it suggests the winter driving lull has passed.

EIA Gasoline Demand

China reported over the weekend it had increased the volume of oil processed through its refineries in January by 29% over January 2009. This is a really large increase in demand when some analysts were worried that China's economy was slowing. The United Nations released a report saying China's economy was going to grow four times faster than the U.S. economy in 2010. China's oil demand is expected to grown by 5% in 2010 compared to 3.7% in 2009. I personally believe we will see more growth than what those estimates predict.

Almost every producer is seeing prices rise. Even Venezuela, with the worst grades of oil, saw their basket price rise by +$2.82 per barrel to $68.52 as of Friday. Venezuela officials said global demand was rising, cold weather in the northeastern U.S. and geopolitical tensions in Iran and Nigeria forced prices higher. In 2009 the average price for the Venezuelan basket was $57.02. This is clearly an indication of rising global demand. If oil were available anywhere but Venezuela the buyers would take the "other" option rather than deal with the uncertainty of the Venezuela government. Chavez has taken payment and failed to deliver more than once in the past.

China's CNOOC and Sinopec are considering bids for a stake in an Azerbaijan oil field currently owned by Devon Energy. The sale of the stake could bring as much as $3 billion to Devon. This represents a 5.6% holding in the Azeri-Chirag-Gunashli oil project. A price of $3 billion would equate to $45 per barrel of proven reserves. That is very high and proves that cheaper oil is rapidly dwindling. If China buys it through one of their national oil companies it will push the total spent for oil reserves around the world to $18 billion since December 2008. The average marginal cost to produce a barrel of oil today is over $50 at the well head. That number takes into account the vast quantities of OPEC oil that can be lifted for $12-$15 today. The price of future oil production is not going down.

Iraq plans on being the largest OPEC producer in 6 years. They want to go from 2.5 mbpd to as much as 12 mbpd in six years. The Iraqi oil minister assured foreign companies contracted to upgrade Iraq's major oil fields that there was "no security risk" for foreign oil companies.

I don't know what he is smoking but it would be worth a fortune on the open market. If Iraq can double their production to 5 mbpd in six years I will be surprised. Iraq is still at the mercy of terrorists and remote facilities are perfect targets for attack. In the days just before the contracts were auctioned off a wave of bombings that killed 120 and injured hundreds more were carried out in Baghdad. I don't know how the oil minister can claim there is no risk with that kind of problem. Iran is becoming an increasing problem with its funding for terrorists inside Iraq. With American troop strength below 100,000 for the first time since the March 2003 invasion, Iran is trying to make its presence felt. The new field developments are not going to proceed without a hitch. Bringing that much oil to market would depress prices and reduce the amount of money Iran can receive for its exports.

While on the topic of Iran the IAEA is becoming more adamant that Iran is working on a bomb. Using a recovered Iranian laptop with plans and instructions for making a bomb they are now virtually certain that Iran is working secretly to create a weapon. They cite the various nuclear facilities that they are prohibited from inspecting and the list of secret facilities that has been uncovered in recent months. This is not going to get better on its own. The U.N. is going to press for round four of sanctions and it will put a security premium back into oil prices.

A Citigroup analysts predicted $86 on this current move in crude prices because of technical reasons not demand reasons. The analyst said crude had broken its 200-week moving average to the upside and would retest the highs before ending the cycle.

Jim Brown