Continued Progress Seen in Petroleum Demand
Dean Foreman
Posted September 11, 2020
While oil markets remain concerned over the outlook for petroleum demand – see John Kemp’s piece arguing there’s lost momentum – a number of important indicators of transportation and industrial activity corroborate API’s primary data suggesting a more nuanced landscape while also supporting the view that genuine progress has recently been achieved.
Since petroleum demand has remained a solid indicator of economic activity, the information has broad applicability to everyone who is concerned with what’s happening now. And for those of us in the industry, accurate and timely data are essential to the flow of real activities and investment dollars.
From here it looks like oil markets have been relatively impatient, having anticipated a continued tightening as demand has recovered and supply declined. The challenge is managing expectations for the rate of recovery.
Before we delve into charts and data, it is worth noting that U.S. weekly petroleum deliveries data have shown marked increases and decreases from one week to the next. In fact, since the onset of COVID-19 in March, the data have been more than three times as volatile as they’ve typically been since 2010.
This year has truly reflected exceptional market conditions, so it is natural for markets to grapple with competing sentiments.
From a measurement standpoint, there also are challenges in using products supplied (timeliest data available) as a proxy for actual consumption.
Under typical market conditions, any measurement error or variance generally would be limited and consistent over time. With prevention measures for COVID-19 disrupting typical conditions, the ability of product supply to reflect consumption has been affected, introducing heightened volatility into data that historically have been relatively stable.
Placing this variation in perspective, you could be optimistic or pessimistic about the market, based on the data of the week. Indeed, the average of the past four weekly points could be interpreted as a lack of momentum.
But context is crucial: This four-week average was in fact more than 30% higher than the market’s low point during the week of April 10.
Next, if we consider refined product demand, with all data averaged over four weeks, the upward trend remained intact through the most recent data as of the end of August.
By comparison, consider the mobility trends suggested by Apple’s tracking of urban driving trends.
The Apple mobility data suggest an average U.S. activity level in August and early September that generally exceeded pre-COVID-19 levels. Seasonality also should be considered, and the uptick in activity also may reflect Americans’ reluctance to use public transportation or fly. Still, the data look unequivocally positive for motor gasoline consumption.
Industrial activity and commercial transportation are additional considerations. A rebound has been apparent in the Institute of Supply Management’s Purchasing Manager’s Index (ISM PMI), traditionally regarded as a go-to U.S. economic indicator.
And the American Chemistry Council’s Chemical Activity Barometer has also rebounded to within a few percentage points of where it began 2020.
We could go on citing additional indicators, and one would not have to cherry-pick to see an uptrend. The ultimate determinant for the path of recovery, however, could turn on the pace of COVID-19 containment.
With the frequency of new cases approaching one quarter of their peak level, there are reasons for cautious optimism even as fall school, university, and sports activities begin to resume, and we similarly hold cautious optimism for this momentum to continue to support a normalization of economic and energy market activities.
Overall, the path towards economic and petroleum demand recovery is not an article of faith, but rather reflects credible indications of the progress underway and, as various sectors of the economy ramp up, that future demand may continue to increase. Again, this is a positive sign of overall economic recovery and its indelible linkage to energy demand.
About The Author
Dr. R. Dean Foreman is API’s chief economist and an expert in the economics and markets for oil, natural gas and power with more than two decades of industry experience including ExxonMobil, Talisman Energy, Sasol, and Saudi Aramco in forecasting & market analysis, corporate strategic planning, and finance/risk management. He is known for knowledge of energy markets, applying advanced analytics to assess risk in these markets, and clearly and effectively communicating with management, policy makers and the media.