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Crude Prices & Rig Counts
The WSJ reports that there are a number of key reasons for crude prices moving above and then back below $50. While there have been significant cuts in OPEC production and rapidly declining rotary drilling rig counts, supply still exceeds demand and until a real recovery becomes apparent, near term prices will stay relatively low. Several days ago, Cambridge Energy Research Associates reported that the collapse in crude prices has set the stage for a potentially very large supply crunch. The principal concern is that if demand does not pick up in 2010, then forgone investment will make it difficult for supply to “catch up” when demand returns.
There purpose of this post is not to develop a new perspective on where crude prices might head as there are countless resources and well-financed analysts working diligently and in many cases with much better insight. The point is to underscore the significance of the demand downturn and potentially how long it might take to recover.
US Petroleum Product Demand
In the second graph I have plotted Total US Petroleum Supplied (000 bbls per day) as provided by DOE’s Energy Information Administration. The minimum, maximum and standard deviations are averages for 000 bbls per day for the months between April 2003 and March 2008. In general, the minimum curve data points were observed in 2003 and early 2004. The maximum points occurred in 2006 and 2007. The graph is represented monthly so as to avoid any issues with seasonality. The total petroleum products supplied are comprised of gasoline, jet fuel, distillate, resid, propane and other. Gasoline is typically 50% of the total products supplied with distillate making up the second largest percentage ~20%.
As observed, US demand began its steady decline below the previous 5 year average in May of 2008. By August, demand was below 1 standard deviation and in October it fell below the minimum for the previous 5 year period. Currently, March demand is 7.3% below the average demand for studied period which translates into 1.5 million bbls per day. Given that the minimum line essentially represents 2003, US demand for petroleum products has returned to levels not seen since 2002 and 2003.
The principal question revolves around how fast supply and demand are decreasing. At some point (as mentioned by CERA), we could find ourselves in a potentially serious supply situation as the time required to deploy capital and restore supply takes much longer than a turn around in demand (when it occurs). However, without some dramatic world event, it is unlikely that a strong move in crude prices will be observed until we see some steadying of demand.