Syed Rashid Husain
JULY has been miserable for oil markets. The upward momentum of the markets came to a halt during the month. For the first time since April, crude markets slipped into a bear phase this very month, as the US benchmark dropped by more than 20%. And brent has not been far behind too.
Despite some indications of life over the last couple of days, markets appeared in the midst of some major, medium to long term, structural adjustments. Brimming stockpiles of refined petroleum products are now raising concerns about near-term demand for crude oil. Despite the ongoing summer driving season in North America, data suggests gasoline consumption in recent months wasn't as strong as expected. This is hurting.
From a crude demand perspective, the summer has already seen a notable disappointment. Ahead of the Fourth of July weekend, Tom Kloza, global head of energy analysis for Opis, had told CNBC gasoline demand per day could top 10 million barrels during the holiday period. But consumption failed to crack that level. Last week, US consumers used about 9.8 million barrels per day of motor gasoline.
"Essentially what happened is the expectation for a very strong summer driving season missed the mark," Michael Cohen, head of energy commodities research at Barclays told CNBC.
"We've already basically gone through, for the most part, half of the summer, and so now with inventories at these very high levels, we have to see the market adjust," Cohen added.
That adds another headwind for crude oil, which fell below $40 earlier last week on concerns that a glut of gasoline and other products would cause refiners to reduce crude runs.
The glut that had accumulated over the recent past is beginning to haunt the markets. Markets are taking note. "Fundamental headwinds are growing, which outnumber any recent positives," Morgan Stanley told its clients last week.
Weak fundamentals continue to play havoc. Despite indications of an upsurge, here and there, the medium to long-term crude scenario is increasingly under cloud - and - for a host of reasons.
For one, the global economic outlook is weak. "We expect global growth to move below consensus estimates," Morgan Stanley said in a recent note.
In the meantime, there is much talk all around about the product glut replacing the oil glut. For this carries ripple effect.
Excess gasoline means that refiners may close their doors sooner and for longer than usual during their traditional summer production shutdown, taking further demand out of the market.
The faltering Asian demand is however, a cause of greater concern. Led by China, Asia was regarded as the global economic hot spot. In times of turbulence, Chinese dragon was seen pulling along the global economy against headwinds of all sorts.
Consequently, China emerged as the largest importer and the second largest global consumer of crude oil. Global demand growth to a large extent rested upon the consumption patterns of China.
That is under threat now. Asian crude demand is weakening, with some underlining it not to be just a cyclical phenomenon, but a product of more permanent structural changes.
Asian crude oil tanker imports have fallen, albeit from record levels, for four straight months and by 12 percent since March to around 82 million tons (20 million barrels per day), slightly below last year's levels.
Much of the surprise decline is explained by conditions in China, the region's biggest consumer, accounting for 27 percent of Asia-Pacific demand and 13 percent of global demand.
With its long-term growth outlook now camped perhaps permanently below 7 percent, most analysts expect vehicle sales in China will slow accordingly. They have already slipped to 2.1 million at the end of May, down from a peak of almost 2.8 million in December 2015.
And in the meantime, with China reportedly approaching the storage limits in its strategic petroleum reserves (SPR), some believe that the Chinese crude thirst would diminish on this count too. In a note, JPMorgan recently said that the Chinese SPR was now at 400 million barrels, which they believed was close to capacity.
For Asia's most developed oil markets, Japan and South Korea too, long-term demand patterns are showing signs of fatigue.
Japan's oil consumption, once 6 million barrels per day (bpd) and 10 percent of global demand, has fallen to not much more than 3.5 million bpd, or under 5 percent of world consumption. It may fall further as government consolidates its refiners.
Korea's oil demand is at a standstill, and demand is expected to decrease further because of greenhouse gas emissions policy.
Many had been hoping India to fill in the demand gap. That doesn’t seem materializing. Demand for new cars, crucial for a healthy crude demand growth, is tepid.
While Indian motorbike sales remain strong, the number of new cars sold has fallen below 215,000 per month, well below the monthly record of just over 300,000 more than four years ago. There are only 25 cars for every 1,000 people, data from energy consultancy FGE show, compared with 110 in China.
Indian crude demand growth pattern may not follow China, some hence insist.
After years of rapid growth, oil consumption growth in Saudi Arabia is slowing down too. The kingdom’s demand for oil increased by an average of 24,000 barrels a day in the first five months of 2016, the slowest growth rate for that period since at least 2010, JODI reported.
And in the meantime, the supply side of the global crude equation continues to be strong. The threat of resurgent US oil production with the rise of drilling rigs is adding to the pressure. And in the meantime, the OPEC member states also are producing at historically high levels.
OPEC output has risen to 33.41 million barrels per day (bpd) in July from a revised 33.31 million bpd in June, a Reuters survey based on shipping data and information from industry sources said.
All this is contributing to the rising inventory.
"The problem is the last five weeks have seen total petroleum inventories rise," Kyle Cooper, a consultant with Ion Energy Group told CNBC's "Power Lunch" on Wednesday. And given those high stockpiles, oil prices could test $35 a barrel in the coming weeks, Cooper added.
And despite hints of life portrayed over the last couple of days, ominous clouds could be seen gathering on the distant crude horizon.
