Dodgy demand data? The oil price collapse conspiracy

WTI crude oil prices fell to its lowest point since early February on Thursday, giving up virtually all gains since Russia invaded Ukraine. WTI crude for September delivery fell -1.5% to close at $89.26/barrel, while Brent crude for October delivery fell -2.1% to $94.71/barrel. WTI oil has lost ~9.5% for the week, which marks biggest percentage decline in one week since April amid growing fears that oil demand will collapse as Western nations descend into full-blown recession.

While oil producers are certainly starting to feel the heat, it is refiners who Valero energy (NYSE:VLO), Marathon Petroleum Corp.(NYSE: MPC), and Phillips 66 (NYSE: PSX ) which has been hit hardest by the pullback thanks to a sharp decline in their refining margins, also known as crack spreads.

For months, refiners have enjoyed historically high refining margins, with the profit from making a barrel of gasoline, the building block of diesel and jet kerosene, hitting a record high of $68.69 in June at a typical Singapore refinery. The margin later settled into the 30s a few weeks later, a level that remains nearly four times higher than $1[ads1]1.83 at the end of last year, and about 550% above the profit margin at the same time in 2021.

But the crack spreads have now gone into full reverse: according to Refinitv data, Asian gasoline margins plunged more than 102% in July to a 14 cents a barrel discount to Brent oil, far from a premium of $38.05 a barrel they reached in June. Asian refining margins have now crashed to just 88 cents a barrel over Dubai crude, from a record high of $30.49 in June.

The effect: a sharp increase in inventory from the US and Singapore to Amsterdam-Rotterdam-Antwerp.

Refiners are being forced to cut gasoline production to minimize losses and switch to producing more profitable fuels.

Actual, Taiwan’s Formosa Petrochemical Corp. (6505.T)Asia’s top fuel exporter plans to cut operating rates at its RFCC units by 5% in the coming weeks, with a Formosa spokesman telling Reuters the company plans to sell more very low sulfur fuel oil (VLSFO). ) due to higher margins for these products.

The Great Conspiracy

The collapse in oil prices has been so epic and unexpected that some oil experts are now accusing the Biden administration of fabricating data about low gas demand in an attempt to hammer oil prices.

In late June, the EIA shut down reporting for several weeks, apparently due to a server failure. But like ForexLive has pointed outgasoline demand data has been consistently poor ever since the EIA came back: “Maybe it’s a problem with reporting, or maybe it’s a conspiracy“, ForexLive has declared.

Even Wall Street has begun to question the EIA data.

Bank of America energy strategist Doug Legate has published a note titled drop in petrol demand seems grossly exaggerated.”

For the week ending July 22, implied gasoline demand rose to 9.2 million b/d — an increase of 1 million b/d compared to the past two-week average and the second-highest level in 2022,” BofA wrote in the note to clients. Curiously, the EIA reported a steep drop in gasoline demand shortly after, prompting Piper Sandler’s global energy strategist to label the data “skewed,” saying the methodology left “significant room for error.”

Related: What’s Really Happening to Gasoline Demand?

“We are to believe that in July, in the middle of the driving season, we only use 8.6 million barrels per day. That would be down half a million barrels per day from May this year; which would be below the Covid low in 2020,” Sandler noted. “So we’re asking all the refiners, we’re asking all the retailers, we’re asking everyone who reported earnings this season. Every single one of them is telling you that their sales haven’t dropped significantly from even days before covid. Some are reporting record sales,” he added .

Piper Sandler’s claims are backed by US refining giant Valero. Asked about falling petrol demand at the company’s earnings call Last week CEO Gary Simmons had this to say:

“I can tell you, through our wholesale channel, there’s really no indication of demand destruction… In June, we actually set sales records. We’re reading a lot about demand destruction and mobility data showing in the 3% to 5% demand destruction range. Again , we don’t see it in our system.”

Furthermore, alternative demand data from GasBuddy deviates significantly from EIA. GasBuddy tracks retail gasoline demand at the pumps in the U.S. According to GasBuddy, there was a 2% increase in demand for petrol last week, making it the year’s strongest demand. In stark contrast, the EIA reported a 7.6% drop in demand for the same time period.

The Biden administration is certainly looking for even lower fuel prices. In a interview with Bloomberg On Tuesday, Amos Hochstein, the White House’s senior adviser on global energy security, said that gas and oil prices must go even lower while US producers and OPEC+ must increase production.

But as Adam Button, chief currency analyst at Forexlive, notes, it’s the Biden administration calling the shots now, and “at the end of the day, traders have to trade what’s in front of them”.

Right now it’s a rough chart breaking support after a big period of consolidation – that’s not good. The calls for a recession are increasingly higher demand for crude oil has a long history of following global growth. There are supply factors that will eventually be bullish – like the SPR releases ending in October – but that’s months away and OPEC is still adding some barrels,” he said.

By Alex Kimani for

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