March 13, 2015

World oil demand increased by 1.1 million barrels per day in February.

This is a potentially important data point that suggests a crude oil price recovery sooner than later. It is also important because it further supports the view that a production surplus and not weak demand is the main cause for the recent oil-price fall.

The latest data from EIA shows that February world liquids production was flat with January but consumption increased 1.1 million barrels per day. This reduces the relative production surplus (production minus consumption) from 1.68 million barrels per day in January to 0.56 million barrels in February. The chart below shows production (supply) in blue and consumption (demand) in red.



World liquids production, consumption and Brent crude oil price. Source: EIA.

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The gap between production and consumption shrunk to its lowest level since April 2014, before the drop in world oil prices as shown in the chart below.



World liquids production surplus or deficit and Brent crude oil price. Source: EIA.

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EIA forecasts that consumption will be lower in the next 3 months before returning to and exceeding the February demand level in June and thereafter for the rest of 2015 as shown in the chart below. IEA data released today is somewhat less optimistic indicating lower demand through the second quarter of 2015 with higher demand in the second half of the year.



EIA 2015 World Liquids Production and Consumption Forecast. Source: EIA.

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I have written before that oil prices will not rebound based on sentiment that rig counts are falling in the U.S., and that something tangible is needed for a durable price recovery. This new demand data may form the foundation for a stable price recovery although weaker demand in coming months might work in the opposite direction. In today’s Oil Market Monthly Report, IEA calls the recent stabilization in Brent prices a “head fake.”

Another tangible signal for higher prices is found in a robust increase in U.S. vehicle miles travelled (VMT). The U.S. Federal Highway Administration released December data this week showing a new monthly record for VMT although per capita driving has not returned to pre-financial crisis levels.



U.S. vehicle miles traveled. Source: J. M. Bodell, Aperio Energy Research.

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The demand information released this week by EIA and IEA do not indicate that oil prices have reached a bottom. They do offer the first tangible signal that lower fuel prices are causing a surge in consumption. This is an important component for price recovery. Production, however, is the larger problem for prices. While February production did not increase, a meaningful price recovery must be founded on a decrease in production that is repeated over several months.