Look for US gasoline markets to tighten in the weeks heading into the summer driving season.
Despite all the gloom and doom over the state of oil demand in the US-wherein the country last year experienced its first drop in oil demand in 10 years (0.3% to 19.65 million b/d)-gasoline and distillate demand showed surprisingly robust growth in 2001, noted London-based Centre for Global Energy Studies in its Global Oil Report Market Watch.
While the outlook in 2002 looks decidedly less sanguine for distillate for a number of reasons, the underlying fundamentals for gasoline remain strong, with rising prospects for price increases in the peak season.
Gasoline outlook
CGES pointed out that US gasoline demand logged year-on-year growth in 2001 of 1.7%; that level reached 2.2% in the fourth quarter. The think tank cited as demand drivers consumers' massive substitution of road travel for air travel in the wake of the Sept. 11, 2001, terrorist attacks on the US and the collapse in gasoline prices last year. Gasoline prices fell 5.4% in 2001 from the prior-year level to an average $1.38/gal, a drop attributable to the plunge in crude oil prices in the fourth quarter and the earlier build-up in gasoline stocks. That big stockbuild had occurred because strong gasoline demand and stout refining margins pushed refiners into overdrive on gasoline production, resulting in a jumo of almost 6% in gasoline stocks.
"With the onset of the driving season, and as the US economy begins its expected recovery in the third quarter of 2002, gasoline inventories will fall, especially given the low refinery runs expected this year," CGES said. "A fall in gasoline stocks will reduce stock cover in 2002, causing upward pressure on prices."
Distillate, other products
It's a different story on the distillate side, with the demand growth this year more bearish vs. an especially strong spurt in distillate demand last year.
Distillate demand grew by 3.2% in 2001, with most of the surge coming early in the year when high natural gas prices spawned a wave of fuel switching by industrial and power generation users from gas to fuel oil. Demand then dropped in response to depressed industrial activity, owing to the recession, and to mild winter weather. By the fourth quarter of last year, distillate demand was actually running 3% less than it did the prior year, CGES noted.
That dramatic reversal in demand led to a stockbuild for distillates that reached a rate of 10%, leading to a jump of 20% in distillate stock cover.
"Recently, lower gas prices, mild weather, and weak industrial activity have continued to depress distillate demand, which the CGES predicts will remain below last year's levels in the first half of 2002, after which it is expected to recover," the think tank said. "Owing to weak demadn, distillate stocks are expected to increase by 5% in 2002. Weak demand and depressed industrial activity will keep stock cover relatively high, maintaining downward pressure on distillate prices in 2002."
In the "Other" category of petroleum products-which accounts for 14% of total US oil demand-the collapse in demand more than offset the growth in demand for gasoline and distillate last year.
CGES cites as the chief culprit here as the precipitous drop in demand for naphtha and other petrochemical feedstocks owing to the recession-induced petrochemical market doldrums.
Rebounding margins
While 2001 was a tough year for US refiners in many respects, signs of recovery were already evident at the start of the year.
CGES pointed out that a pickup in refinery runs in January helped dissipate some of the crude stock overhang from 2001-still up 8.5% year-on-year as of last month.
Margins nevertheless improved a bit in January. There's still some upside for margins, as the evolving rebound in demand in tandem with the still-to-arrive reduction in OPEC and some non-OPEC oil supplies-a result of the Jan. 1 accord between both groups of oil exporters-should whittle away the crude stock overhang still further.
With refinery runs certain to accelerate as the summer driving season approaches, the outlook is for continued firming of gasoline prices and some growth in margins-at least until the next spike in crude oil prices.
