Conclusion: Recent demand data points from two of the world’s largest importers of oil, China (third largest importer) and the United States (largest importer), are meaningfully bearish for price.
We want to highlight a couple of recent data points related to oil demand globally that are solidly on the bearish side of the ledger. While oil has had a good move over the last couple months based on U.S. dollar weakness, its move has been somewhat muted versus other periods of U.S. dollar weakness. This is likely primarily related to a realization that future economic growth in the U.S. is slowing, and based on emerging negative demand data points.
The first point to highlight on the demand side is related to distillate stocks in the United States. In the chart immediately below, we show that distillate stocks are currently at a 27-year high in the United States. Distillate stocks are primarily comprised of heating oil and diesel fuel. The massive build in distillate stocks obviously reflects very weak end market demand.
Diesel, specifically, accounts for ~18% of all petroleum demand in the United States (second only to gasoline) and 95% of all goods transported in the United States are done so via diesel engines. A drop off in demand for diesel is therefore meaningful to overall oil demand in the U.S., but also an indicator for economic activity in the U.S. On both fronts, this increase in distillate stocks seems to be a bearish indicator.
The second data point to highlight is from China and relates to Chinese imports of oil in July, which fell off somewhat precipitously from June. Specifically, oil imports were down 3.2% year-over-year and down 14.7% month-over-month. While we aren’t ready to take one month and extrapolate, it is in the short term, bearish for price.
As we wrote in late July:
“U.S. dollar correlation - In 2009, the key macro factor driving the re-flation trade was U.S. dollar down, and everything priced in U.S. dollars up. Simply, the decline in value of the U.S. dollar versus other currencies increased the inherent value of those global commodities that were priced in U.S. dollars. Oil was a primary beneficiary as its price increased by almost 80%. The correlation, or at least the strength of it, is no longer intact. In fact, since late June we have seen a dramatic decline in the U.S. dollar versus other major currencies, north of 7%, but have not seen a similar move in oil. In 2009, oil moved inversely to the dollar with a factor of more than 4:1. As noted, recently that correlation has gone away, so despite being bearish on the dollar, we are not seeing a corresponding correlation that makes us bullish on oil.”
The fact that oil is not inflating with the same vigor as in 2009 combined with the fact the bearish data point continue to pile up, makes us bearish of oil from a supply / demand perspective.
Daryl G. Jones