US oil demand has never been higher and what it means for the oil market in 2022

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Today’s EIA report was a doozy. US crude storage with SPR fell below 1 billion barrels, implied demand for US oil on a four-week average basis hit a record high and product inventories fell this week. From a seasonal perspective, we are expected to build in the first quarter, but a combination of bullish weather and tight fundamentals are pushing stocks even lower.

4-Week Average U.S. Product Supplied in Petroleum Products

EIA, HFI research

The only crazy thing about demand for this year so far is that we’re not even in peak demand season yet. Gasoline and jet fuel continue to be below standard due to cold weather and COVID restrictions.

As the economic reopening continues and restrictions are lifted more broadly, jet fuel demand will surge and gasoline consumption is expected to significantly exceed 2019 levels.


EIA, HFI research

Another important point of the EIA report is that the three key product storages are not built at all, namely the distillate.

product storage

EIA, HFI research

And here is a distillate chart:


EIA, HFI research

As we wrote in an OMF this week titled “The biggest energy story of the year will be acute product storage shortages and what that means for your investment portfolio,” refineries around the world will win big money this year with huge incentives to keep increasing throughput.

With distillate being the main shortage in the product segment and the rebound in air transport, refining margins will continue to increase. Integrated majors continue to be the space to own with leveraged upstream producers.

Larger image here…

Let’s take a step back here and think about the big picture. What does all of this mean for oil prices or oil market balances for the rest of the year?

Well, normally the first quarter of any year is the lowest demand period. The first quarter is therefore generally a good signal for what will happen for the rest of the year. If you start balancing the oil market in the first quarter with huge surpluses for example (remember 2017?), it’s usually a catch-up for the rest of the year.

Now, if you start the first quarter with much larger deficits than expected, you’re basically trying to fill the gap for the rest of the year. Well, this year’s Q1 drawdowns so far are 2x larger than any Q1 deficits we’ve seen in history.

If you need to read that again, go ahead, we’ll wait. To put it bluntly, we’ve never had draws of this size for this time of year, period.

Supply and demand


Now for the IEA’s projection for oil market balances in 2022. Q1 was supposed to show 1.2-1.4 million barrels build (depending on your OPEC crude assumption). We’ve pointed this out many times in the past, but here’s one more friendly reminder: here’s the IEA demand chart for North America:


EIA, HFI Research, AIE

I don’t know about you, but IEA is hilarious enough.

As a result, the implied OECD oil inventory balance so far is -1.1m b/d. This does not include non-OECD countries, so final figures may change. But if the most visible data continues to fall, it is a good sign for the balances of the oil market.

Again, we are aware that some of the elements of the bullish demand are coming from the weather, but this has also had a negative impact on the demand for gasoline and jet fuel. So, as the weather normalizes, the heating demand segments will decline, but the transportation segments will rebound.

So, looking at all the data so far, there’s really only one reasonable conclusion we can reach: if demand continues to remain strong, all of the supply and demand patterns of energy must be thrown out the window.

This is bullish for oil prices, as everyone is currently forecasting increases. So go long on energy stocks, buy on dips and expect even higher oil prices in the future.

Steve R. Hansen