This week’s EIA data had implied all product demand plummeting 0.9mmb/d (-5.0%) WoW to 18.0mmb/d, one of the weakest readings YTD and well below the prior five-year range. Only two product categories had implied demand above the lower end of the historical range: jet kerosene and propane/propylene which, combined, made up just 16% of all product demand. Implied demand for the volatile ‘other oil products’ category was hit particularly hard, down 0.6mmb/d (-16.8%) WoW, as was gasoline which lost 0.5mmb/d (-5.3%) WoW and is down 1.7% YoY.
Production was still heavily shut-in at the Gulf of Mexico (GoM) following the aftermath of Hurricane Isaac, leaving domestic production at the 5.5mmb/d level . We expect approximately 0.1mmb/d of lost production due to Isaac to be reflected in next week’s report, versus circa 0.8mmb/d in this reporting period. Refinery utilisation also remained affected by Isaac, with PADD 3 registering sub-80% utilisation for only the third time YTD. As a result, refinery throughput remained below average, at 14.3mmb/d.
Crude inventory surprised with a 2mmbbl WoW gain, against market expectations of a 2.9mmbbl draw, taking it back within sight of the top of the historical range. Given lower refinery throughput, days forward cover (DFC), jumped to the top of the range, at 24.0 days. Gasoline and distillate inventory levels remain comfortable in DFC terms.
Brent trading at USD 116/bbl is not in line with supply/demand fundamentals, in our view. Oil markets have been oversupplied since the turn of the year, per the IEA’s statistics, and look set to continue to be oversupplied through 2013 should OPEC maintain August production levels. In our view, the oil price is being propped up by tension in the Middle East, particularly over Iran’s nuclear ambitions. We remain sceptical that Israel will launch an overt unilateral attack on Iran. As and when the markets take the view that threats of such an attack are unlikely to be followed up with action, we expect oil to sell-off sharply.