Reports: Global Markets Still Short; Russia's War in Ukraine Amplified Pre-Existing Imbalances

Dean Foreman
Posted June 16, 2022

API’s latest Monthly Statistical Report (MSR), with primary data for May, and Industry Outlook presentation for the second quarter of 2022, help place increased costs of fuels and everyday products that have made headlines and raised the concerns of American families and policymakers in context with the global and U.S. economies, as well as oil and natural gas market fundamentals.

Consistent with points we highlighted at the beginning of this year (see here and here), the implications of this outlook have continued to suggest that either economic growth could slow or energy markets could remain under pressure.  Global oil and natural gas markets were notably short, with demand outpacing production entering 2022, according to the U.S. Energy Information Administration (EIA).  And everything about Russia’s invasion of Ukraine has amplified these pre-existing pressures on market fundamentals.

Additionally, as U.S. commercial crude oil and product inventories have fallen to their lowest levels since 2014, U.S. economic and energy security could hinge on what policymakers choose to do next.  With sincerity and humility, it is past time that policymakers put partisan politics aside and take actions, like API’s 10 in 2022 policy plan to restore U.S. energy leadership, which could help to address the pressures on U.S. petroleum markets.

Let’s start with the MSR™ highlights based on API’s primary data for May 2022:

• U.S. petroleum exports of crude and refined products rose to a record-high 9.6 million barrels per day (mb/d) amid Russia’s war in Ukraine.
• U.S. crude oil production (11.9 mb/d) increased in May for a third consecutive month.
• U.S. commercial crude oil and total petroleum inventories (excluding Strategic Petroleum Reserves, SPR) were the lowest for May since 2014.
• With record-high nominal motor fuel prices, U.S. petroleum demand (19.9 mb/d) fell by 1.0% year-on-year (y/y) versus May 2021.

The leading figure in May’s primary data was a record-high international pull for U.S. petroleum exports, including crude oil and refined products, of 9.6 mb/d that coincided with the start of the summer driving season.

Meanwhile, U.S. petroleum demand increased seasonally by 3.2% month-on-month (m/m) from April, but notably slid by 1.0% y/y compared with May 2021 as motor gasoline and diesel fuel prices struck record-high nominal levels, according to AAA.  One relative bright spot, however, was the highest air travel and thus jet fuel demand since February 2020.

U.S. crude oil production and refining activity both rose during the month, but commercial inventories of crude oil and refined products remained at their lowest for the month since 2014. 

These points are symptomatic of the market fundamentals elucidated in the Industry Outlook for the second quarter of 2022.  Perhaps the most important point of departure is to recognize, as we’ve previously discussed, that the highest price inflation in 40 years, compounded by Russia’s war in Ukraine, has led to broadly lower economic growth expectations for 2022, per the International Monetary Fund, World Bank and Bloomberg economic consensus.  These forecasters expect global real GDP growth of about 3% y/y in 2022, down from expectations of nearly 4% entering this year.  The World Bank, in particular, noted this is the largest global slowdown in 80 years.

While it is important to acknowledge that slowing of this speed and magnitude could stress already fragile macroeconomic balances, particularly among emerging economies that are commodity importers, it also is important to note that the level to which global growth could slow this year remains well above long-run average growth rates, both for the United States and the world, per the IMF and Bloomberg economic consensus.

For energy demand that historically has gone hand-in-hand with economic growth, this likely means the world needs more energy this year than it did in 2021 – to the tune of more than 2.0 mb/d more oil and 6.0 billion cubic feet per day more natural gas by EIA estimates.

Moreover, even with diminished economic growth projections, EIA expects global oil demand still to grow to record levels in 2023.

Consequently, with solid demand and the record pull for U.S. petroleum exports, finding the energy supplies to meet this apparent demand is the key challenge. 

From the perspective of U.S. refining, the response has been resoundingly clear:  They’ve stepped up to the plate with three consecutive months of capacity utilization rates over 90%, plus refinery throughput in May at its highest since June 2021.

Accelerated refining without equivalent increases in upstream crude oil production, however, has translated into the aforementioned historically low commercial crude oil inventories.  Elevated oil prices coupled with lower futures prices also have historically reduced the incentive to accumulate inventories, which makes U.S. SPR more crucial to guard against potential global supply disruptions. 

Notably, however, as of June 3 the U.S. SPR was at its lowest levels since March 1987 and could decrease further if the administration’s publicly announced prospective releases of up to 180 million barrels over six months in 2022.

For U.S. natural gas, the story is similar in that production growth that has not been able to keep pace with resilient domestic demand plus a strong international pull for U.S. exports.  In turn, natural gas storage injections to far this season have lagged those of last year as well as the five-year range per EIA and supported prices in June that have exceeded $9.00 per million Btu. International landed natural gas prices have remained above $22 per million Btu in what appears by all indications to have evolved into a genuine international energy crisis. 

The myriad implications of this combination of market fundamentals could spell caution for consumers and highlight the need to monitor product stocks, especially on the East Coast, which normally relies on European trade for part of its supplies.

It also raises questions about whether policymakers will come together to address the situation in a cogent fashion – or whether the natural gas and oil industry will continue to face disjointed and often hostile administration policies aimed at motivating a transition from fossil fuels.

Let’s be clear:  The Biden administration’s desired path to decarbonization relies critically on consumers’ ability to afford the transition.  And, before the energy transition, we need to satisfy the “energy expansion” with continued economic and therefore demand growth.

In other words, we need to accomplish 10 in ’22 faster than you can count to 10.Please see the API MSR™ and Industry Outlook for greater details on the economy, its pace of investment and implications for oil and natural gas markets.