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.
"It's almost as if middle distillates are coming out as a byproduct of gasoline," Leitch said. "I don't think it's just a European problem. Wherever refineries can, they are running hard."
Leitch and others note that a colder-than-usual European winter was behind at least part of the demand boost in the first quarter. A change to cleaner grade shipping fuel accounted for a portion as well.
Questions around the driver of the early-year demand, along with the building stocks, have raised fresh questions about whether the growth will continue apace - and even so, if that would be enough.
"There has been some underlying growth of demand. But the supply response has been greater," said Olivier Jakob, oil analyst with PetroMatrix, said. "Demand needs to increase more to absorb."
While gasoline can continue to support refiner profits for months to come, building stocks could simply be masking for now the extent of the oversupply in oil markets.
"To fully balance the market, you'd need 3.5 percent demand growth – at least one percentage higher," said Bjarne Schieldrop, chief commodities analyst with SEB in Oslo.
According to the latest figures from the IEA, oil product stocks in the developed world crept above the five-year average in the spring of this year for the first time in more than four years.
"We have seen oil stocks trending higher," Schieldrop said. "The market is running a surplus and you are constantly adding some push to the downside as a result."
There is at least 40 million barrels of independent distillate storage capacity still available in the Atlantic basin, according to analysts Energy Aspects, which can easily absorb the tidal wave of products they expect over the coming months. But this build will eventually ramp up pressure on crude prices, unless there is a slowdown in oil output.
"Diesel fundamentals are weak, but crude fundamentals are weaker, so the downward move in crude is likely to be greater," Energy Aspects said.
Editing by William Hardy