MSR: Petroleum Demand Soars Amid Continued Supply Challenges, Reduced Refining Competitiveness

Dean Foreman
Posted January 21, 2022

Over the past year, we’ve consistently said if economic growth stayed on track the world would likely need more oil to meet demand. API’s new Monthly Statistical Report (MSR^™), based on U.S. petroleum primary market data through December, suggests this was resoundingly so – despite the onset of Omicron COVID variant and likely due in part to it.

Specifically, U.S. petroleum demand returned to 21.1 million barrels per day (mb/d) in December with more people driving places instead of flying. Supply chains required more fuel for freight trucking and marine shipping, and the other oils – that is, intermediate products in refining and petrochemicals that enable the manufacturing of medical plastics and sterile packaging – rose in December. That’s their highest level on record since 1965, representing 29.4% of total U.S. petroleum demand.  

By contrast, the production of U.S crude oil and natural gas liquids (NGLs) remained flat overall, with a minimal response by investment and drilling even as oil prices returned to more than $80 per barrel in January. Especially with Omicron, it could have been hard to initiate new drilling in December. We should get clearer readings through the first quarter of 2022, which coincides with a new calendar year budget cycle for many producers.

We have repeatedly seen this combination of oil demand outpacing supply over the past year, which narrowed price differences between domestic and international crude oil. Under these circumstances, we generally saw relatively higher domestic crude oil prices corresponding with lower U.S. crude oil exports. This also appears to have reduced the export of U.S. refined products, which fell to their lowest level for the month of December since 2015. Since December data could have been influenced by year-end seasonality, it remains to be seen if this observation reflects a trend, but it is a key point to monitor with high stakes for U.S. investment, trade and economic activity across the value chain.

Lower domestic oil production has also required refiners to use oil that’s already been produced and consequently reduced U.S. crude oil inventories to below their five-year range. Meanwhile, U.S. crude oil imports rose by 0.5 million barrels per day (mb/d) in December compared with a year ago.

In fact, the U.S. was a petroleum net importer in December and for 2021 overall. The U.S. taking net barrels off global markets instead of contributing to them has therefore contributed to global oil market tightening and helped support oil and petroleum product prices that have remained around their highest since 2014.

Another new point apparent in the latest MSR^™ is the impact of lowered domestic oil production on the U.S. refining industry, above and beyond drawing on regional inventories. Refining activity rose in December, but its throughput and capacity utilization rates were the second lowest for the month in a decade or more. Meanwhile, U.S. refined product exports fell by 0.6 mb/d y/y in December to their lowest levels since 2015, despite demand for global liquid fuels that eclipsed 101 mb/d per the U.S. Energy Information Administration (EIA), exceeding its level from December 2019. 

Let’s be clear:  global demand for petroleum products exceeded its pre-COVID levels in December, but U.S. refiners contributed less to global markets. The lower U.S. refining activity and product exports also likely reflect the challenges of less abundant domestic crude oil production, which reduced the historic discount of U.S. crude oil versus global prices, as the U.S. reverted to being a petroleum net importer. EIA expects the U.S. will be even more of a net petroleum importer in 2022.

Leading economic indicators were mixed in December. API’s Distillate Economic Indicator^™ suggests continued growth of U.S. industrial production and broader economic activity, but consumer angst and therefore spending uncertainty rose, per the University of Michigan’s consumer sentiment index.

Therefore, the overall picture that emerged from the October data was one where demand growth eased at relatively solid levels, and where supply had lagged but began to catch up with demand.

Other December 2021 MSR^™ highlights:

• Motor gasoline demand in December was 1.0% above that of December 2019.
• Strongest December distillate demand since 2014, driven by trucking.
• Strongest December residual fuel oil demand since 2011, due to marine shipping.

Please see the latest API MSR for details, product-level analysis and data.