API Q2 Industry Outlook: The Tide Turns

• This matters because financial market valuations do net yet appear fully to reflect the fact, and economic growth and energy demand have tended to be intertwined.

Elevated Economic Risks

As pressures for price inflation and interest rates have risen – and could be compounded by trade barriers – risks to economic growth have risen.

• Many countries around the world have achieved solid economic growth in concert, based in part on low interest rates and record amounts of debt. The IMF recently highlighted that, if the cycle turns, the risks for financial market volatility have been heightened. 

Record Global Oil Demand

According to the Energy Information Administration, global oil demand in Q2 2018 eclipsed 100 million barrels per day (MBD) for the first time.  Remarkably, U.S. supply growth has by itself been sufficient to meet virtually all global oil demand growth, which the EIA estimates was 1.8 MBD y/y and suggests the U.S. more than compensated for declines in other regions.

• Strong economic growth has resulted in record oil demand.  This is a relationship that the International Energy Agency (IEA), the U.S. Energy Information Administration (EIA) and others underestimated coming into this year, as they expected relatively little demand growth from advanced economies globally. For example, through the first five months of the year, U.S. petroleum demand was more than 600 thousand barrels per day (KBD) above the same period in 2017. The largest single product was gasoline, and its demand for the first five months of the year was the highest on record since 1945, despite prices that had risen.

• As of May, U.S. petroleum supply had risen by more than 2.0 million barrels per day (mbd) since the same month last year, and since the beginning of January the U.S. has added 138 rigs (a 14.6 percent increase).
• Oil prices have risen this year and are influenced by myriad market-based factors, including supply, demand, inventories, and geopolitics – current assessments as well as expectations.  With inventories having fallen since last year, the market has had less of a cushion than it did for the past few years.

• U.S. petroleum inventories normally accumulate during the month of May, but that didn’t happen this year for only the third time since 1956.  Some people might attempt to blame U.S. crude oil exports, but that blame would be misplaced.  U.S. crude oil inventories accumulated in May on par with their median rate (0.3 percent) since 1956, so it was mainly about the strong demand for refined products. That’s a good problem to have because it means that consumers and businesses have thrived with solid employment conditions, wage growth, and sentient that has enabled their livelihoods and supplied the fuels and materials that enhance modern society.