Oil Data Is Robust, So Why Is Demand Sentiment So Poor?

Recently, Wall Street analyst BMO Capital Markets noted that U.S. market sentiment has lately fluctuated from recession fears to soft landing expectations in a short period of time any time there is a release of a major economic data point. 

"Clearly the pendulum has swung in favor of optimism with the S&P 500 recovering sharply from its recent sell-off and once again approaching record highs," BMO Capital Markets investment strategy team stated in an investor note. BMO's observation describes oil markets to a tee. Oil prices have been on the backfoot last week, pulling back from gains in recent weeks thanks to easing geopolitical fears and seemingly never-ending demand concerns. 

Last Monday, U.S. Secretary of State Antony Blinken announced that Israeli Prime Minister Benjamin Netanyahu had accepted a cease-fire proposal to stop the war in Gaza. Not surprisingly, front-month Brent recorded four consecutive trading days of lower highs, lower lows, and lower settlements. Trend-following algorithmic traders appear unusually dominant, something commodity analysts at Standard Chartered have attributed to seasonal lull among other traders.

However, oil prices rallied again on Friday after sources close to the White House reported that such a deal is unlikely since Hamas is unlikely to accept Israel's terms, which include the occupation of the Philadelphi corridor, which Israel claims gives Hamas a strategic lifeline. Oil jumped again on Monday morning after Libya's government in Benghazi said that the country's oilfields were closing down and all production and exports would stop.

Related: U.S. Oil, Gas Drilling Activity Declines

According to StanChart, over the past four weeks, open interest across the main Brent and WTI contracts declined to a three-month low, falling by 256 million barrels. The analysts have noted that this could be due to a lack of consensus about how to trade oil during a turn in the rates cycle or exhaustion among the usual fundamental longs, given that any big rallies this year have been quickly followed by prolonged pullbacks any time some bearish development hits news feeds. 

StanChart says sentiment has generally been poor, weighed down by forward-looking demand concerns despite actual demand data being robust.

StanChart has been able to gauge crude demand on a global scale following the release of Joint Oil Data Initiative (JODI) data on 19 August. According to the commodity experts, global oil demand in the month of June clocked in at a healthy 103.01 million barrels per day (mb/d), an all-time high. Following JODI revisions, StanChart estimates that May demand came in at 102.68 mb/d, the second-highest monthly average after June. The average demand growth for the second quarter was 1.521 mb/d y/y, close to StanChart's forecast for 2024 full-year growth (1.514 mb/d). Meanwhile, global crude supply growth remains muted, with June supply increasing by 160 kb/d m/m to 102.097 mb/d, well below December 2023's all-time high of 103.162 mb/d.

Limited global supply growth can largely be attributed to weak non-OPEC growth, particularly by the U.S. Oil production in the United States is set to grow just 2.3% in the current year as shale producers stick to production discipline and goal to return capital to shareholders. Crude exports from U.S. ports have averaged 4.2 million barrels per day so far this year, up a mere 3.5% Y/Y compared to a robust 13.5% growth in 2023. This year's growth clip is the lowest since 2015, when the country lifted a 40-year federal ban on the export of domestic crude.

The only bearish data point in the JODI report is that demand growth has been slowing, with June demand growth clocking in at 788 thousand barrels per day (kb/d), a deceleration from 1.267 mb/d in May and 2.129 mb/d in April. Overall, StanChart has predicted that global demand will remain above 103 mb/d for the rest of 2024, before falling to 101.9 mb/d in January due to seasonality.

The latest weekly report by the U.S. Energy Information Administration (EIA) is equally bullish. After last week's small increase, U.S. crude oil inventories resumed their decline, losing 4.65 million barrels (mb) w/w to a six-month low of 426.03 mb. That brings the cumulative fall in crude oil inventories over the past eight weeks to 34.7 mb, averaging 620 thousand barrels per day (kb/d). Distillate inventories fell 3.31 mb w/w to 122.81mb. StanChart notes that whereas the implied August distillate demand is weak, there is often a substantial upwards revision in the monthly data. To wit, back in May, Standard Chartered reported that the EIA has systematically underestimated transport fuel demand. According to the analysts, U.S. gasoline demand has been revised higher in 20 of the last 24 months, with an average revision of +146 kb/d, which is 1.6% of demand. Well, StanChart was later vindicated, with the EIA revising May gasoline demand to 344 kb/d higher to 9.396 mb/d, which is good for a 3.5% Y/Y increase. Jet fuel demand rose 5.9%Y/Y while total oil demand was revised higher by 811 kb/d to 20.8 mb/d, good for a 2.3% increase. Only distillate demand remained weak in the revised data, although the -3.6% Y/Y fall is significantly lower than EIA's prediction of -7.1% decline.

By Alex Kimani for Oilprice.com

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