Red-hot fuel demand can't shore up the oil price alone

Wed Jul 1, 2015 8:54am EDT
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By Libby George

LONDON (Reuters) - Sales of transport fuels have exceeded all expectations this year, making demand from reviving economies the mantra of bulls who say the oil price is well on the mend.

But warning signs, especially in Europe, may derail that view. Growing stocks, and early stress signals for some oil products, such as diesel, are throwing a cautionary signal to those who believe the shale oil-driven glut in physical crude markets will be absorbed by demand alone.

Gasoline consumption has bounced far higher, with U.S. drivers joining those in India, Indonesia and China in driving more often, and in some cases in less fuel efficient cars. Diesel for goods-laden trucks and jet fuel has also been in higher demand.

The consumption strength across products led the International Energy Agency (IEA) to revise its demand forecast higher several times, with a current estimate of 1.4 million barrels per day, or 1.5 percent, in growth.

But with refineries worldwide working flat out, whether or not consumers want the products, because their margins are so rewarding, the glut could be moving from crude oil into its refined by-products.

"The global crude surplus is being converted into a product surplus. Refiners are being guaranteed a margin by the massive overhang of crude," said Jonathan Leitch, chief oil analyst with Wood Mackenzie.

Analysts say middle distillates in Europe are showing particular signs of early stress.  Diesel demand fell in France and Italy in May, and growth began to sputter in Spain. The building storage is also casting a shadow on some of Europe's early-year growth. 

In the Amsterdam-Rotterdam-Antwerp hub, a key indicator of demand health, distillate stocks hit an all-time high last week, according to PJK International. Industry monitor Genscape show them nearly 20 percent higher than the same time last year. German heating oil stocks have remained above average all year.   Continued...

Oil pumps are seen at a MAX oil station in Yangon April 21, 2014. 
REUTERS/Soe Zeya Tun