Demand’s long haul

Published at 12:13 10 Jul 2017 by . Last edited 16:01 10 Jul 2017.

Even with a 13.5 mb crude and products draw in the US, prices fell sharply. Across the last four weeks, stocks reported by real-time data (US, ARA, Japan and Singapore) show a 17.4 mb draw vs a five-year average build of 3.3 mb. The physical market continues to improve but flat price still has a mind of its own, and last week, the focus was on high Saudi exports and peak demand.

This was driven by carmaker Volvo announcing last week that from 2019, none of its new car models will be powered by combustion engine alone. Indeed, the narrative of ‘lower for longer’ oil prices is slowly morphing into ‘lower forever’: after all, if the writing is on the wall for oil (demand), there will surely be a fire sale amid suppliers to get rid of their reserves and supplies before the end arrives. This is already distorting the back end of the curve, weighing on sentiment.

While electric cars are undoubtedly changing the slope of gasoline demand growth, some context is useful. In the world’s largest electric car market, China, EVs constitute 0.5% of the existing car fleet, with sales of conventional cars last year alone 25 times that of the EV and hybrid fleet size.

But anaemic gasoline demand growth this year in the two largest markets, US and China, is adding to the worries, even though we believe that the softness in gasoline prices is more to do with abundant supplies than with a downfall in demand. Growth is weak but it is not collapsing.

And it is diesel that is growing strongly. Early indications for Q2 17 point to y/y gasoline demand growth of 0.24 mb/d while diesel is at 0.42 mb/d, supported by a stellar economic backdrop and renewed infrastructure spending. Moreover, while the world focusses on passenger vehicles, heavy trucks have become the fastest growing sector for oil demand, a trend set to continue.

Fig 1: Chinese actual demand, y/y, mb/d Fig 2: Indian diesel demand, mb/d
Source: NBS, China Customs, Xinhua, EA Source: PPAC, Energy Aspects

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