Oil Demand Back, But Supply Remains Key Question

Dean Foreman
Posted June 17, 2021

The expectations and real prospects for global and U.S. economic recovery – and energy markets along with them – have accelerated and appear bright. That’s the overarching point in API’s quarterly Industry Outlook for Q2 2021 and Monthly Statistical Report (MSR), echoing what we have said since the third quarter of last year (see here, here and here). 

Yet, while API’s primary data for May 2021 show the recoveries in U.S. economic growth and petroleum demand have continued to go hand-in-hand, potential record global oil demand growth this year and the next, per the U.S. Energy Information Administration (EIA), could be overshadowed by the lowest industry-wide real capital expenditures on record for any quarter, by API estimates.

Demand up and capital investment down by record amounts is a concerning combination.

The API 200 companies across the energy value chain that we monitor collectively invested $38 billion of capital in Q1 2021, which was the lowest for any quarter including the 2008-2009 Great Financial Crisis. At the same time, the backlog of large capital projects (other than for upstream resource development) fell to $184 billion in Q2 2021 from $344 billion one year ago. The decrease was a combination of project completions, delays/cancellations and a lack of new projects joining the queue. And it’s a global concern.

Not only have global drilling and investment fallen to historic lows, the Middle East/North Africa region (MENA), which historically has been, along with the U.S., a go-to source for oil relatively quickly and at low lifting costs, has also cut its investments. A four-year outlook of MENA’s committed investments for oil development have fallen both in their level and relative share compared with other fuels in the period 2021 to 2025, according to APICORP.

In my opinion, the dearth of drilling and investment – reflected in APICORP and other data – appears to be due to a combination of industry capital discipline, company financing availability, and people limitations. To expand beyond their budgeted activity levels, many companies would have to find and contract/re-hire employees who were laid off during the 2020 COVID-19 recession. In some cases, companies’ capabilities to take on certain kinds of projects have been destroyed. 

If neither the U.S. nor OPEC invests at a healthy pace, the world becomes more reliant on the re-deployment of OPEC+ spare production capacity, which by EIA estimates appears sufficient for this year but may not be so in 2022 if there is strong continued demand growth and U.S. drilling and production fails to pick up.

Our confidence in the demand strength is grounded both by API’s primary data that showed total U.S. petroleum demand rose to 19.8 million barrels per day (mb/d) in May (which was up 1.0% from April and to within 2.8% of its level in May 2019) as well as EIA’s global outlook, which suggested May global oil demand was within 3.7% of its May 2019 level.  Demand is back!

With higher demand but flat domestic supply, the U.S. returned to being a net importer of petroleum for the third consecutive month.

Strong and positive leading economic indicators reinforce the strength of these observations.

Specifically, API’s Distillate Economic Indicator^™, which is based primarily on diesel/distillate supply, demand, and inventories, had a reading of +1.4 in May and a three-month average of +1.7, which was both its highest reading on record since 2007 and suggested that U.S. industrial production and broader economic activity have continued to accelerate. 

Other MSR highlights:

• Gasoline demand exceeded 9.0 mb/d for the first time since 2019, apparently led by demand recovery in urban commuting.
• Refining and petrochemical demand for other oils – naphtha, gasoil, propane/propylene – of 5.3 mb/d was a record high for May and 13.5% above its May 2019 level.
• Increased momentum for refining throughput of 15.8 mb/d and its implied capacity utilization rate of 87.1%.

In summary, we had been looking forward to May data for a reading on momentum heading into the summer driving season, and the data suggest that the economic and oil market recoveries remain on solid ground.  If this continues as EIA, the International Energy Agency, KAPSARC, and others suggest, the question – and a potential concern for every household – is whether supply can keep pace.