US H1 oil demand: biggest fall in 17 years

US petroleum deliveries for the first six months of this year, a measure of demand, experienced the largest year-to-year decline since 1991, the last time the US was in a deep recession, the American Petroleum Institute said July 18.

During the first half of 2008, a period when world crude oil prices were reaching record highs, deliveries fell 3% from a year earlier, the Washington-based trade group said in its monthly report.

Gasoline deliveries alone fell 1.7%, the first significant decrease for a six-month period since 1991, as consumers, faced with record high gasoline prices now averaging more than $4/gal nationwide, cut back on driving.

First-half product deliveries, at 20.08 million b/d, were at their lowest for any six-month period since early 2003.

"Gasoline has a greater share of discretionary spending by consumers" who are clearly cutting back on travel, vacations and other trips as they feel the pinch at the pump and a lackluster jobs environment, Ron Planting, API's manager for information, and analysis said on a conference call after the data was released. "Higher pump prices and a slowing economy were undoubtedly factors," he said.

Crude oil prices last week fell more than 11%, the biggest weekly decline since 2004, mainly due to signs of weakness in the US economy, with Federal Reserve Chairman Ben Bernanke saying the US economy faced "numerous difficulties" and would likely see below-trend growth in the year ahead as the economy deals with a credit crunch brought on by faltering banks and a continued deep slump in the US housing market. New York Mercantile Exchange front-month crude futures hit a record $147.27/barrel on July 11 on continued US-Iran tensions and a falling US dollar, but settled at $128.88/b on July 18.

The effects of slowing demand were visible in US petroleum imports, which sank to their lowest first-half level since 2003, at less than 13 million b/d. Crude oil imports fell 2.5% from a year earlier, while product imports slipped nearly 10%. Imports of most major products showed declines.

US petroleum deliveries growth already had been faltering during the prior three years, managing only to hold relatively steady over that period, API said.

Second-quarter results alone showed a decline in overall US deliveries of 1.8%, led by a drop for gasoline deliveries of 2%. However, the warmer-than-average winter that had slowed distillate deliveries in the first quarter was not a factor in the second quarter, when demand for diesel apparently continued to be more robust than for gasoline.

"There's less flexibility" in diesel spending now, said Planting, who said truckers had likely already made as much conservation as they possibly could in their routes, given record diesel prices, which now average more than $5/gal. "The weakness in gasoline demand hasn't carried through to diesel demand," Planting said.

Reflecting continued demand for diesel fuel, industry production of that product set new record highs in the first half. Distillate production over all averaged 4.23 million b/d, the highest ever for any six-month period.

Although not cited by API, a significant factor in the distillate market has been growing US exports. API said only that US petroleum exports in the second quarter rose more than 25% to 1.675 million b/d, up from 1.334 million b/d a year earlier. According to the latest data from the US Energy Information Administration, US distillate exports hit a fresh record high in April, as strong global demand continued to pull diesel cargoes out of the US.

The latest monthly figure for US distillate exports of 472,000 b/d shattered the previous record of 402,000 b/d from February of this year, as well as the April 2007 figure of 167,000 b/d (ON 7/2). Most of the exports headed to South and Central America.

Democrats in Congress are hoping to bring down the prices of gasoline and diesel by forcing the Bush administration to swap out light sweet crude, which is more easily refined into diesel and gasoline, that is in the 704 million barrel Strategic Petroleum Reserve for heavy sour crude, which is harder to refine. The swap might put as much as 500,000 b/d of light sweet crude on the market. But the API's chief economist, John Felmy, said July 18 it might not make a great deal of difference in the price of diesel as many refineries will not have the additional capacity for the increased supply of crude.

"Swapping one type of oil for another doesn't increase supply," Felmy said on the conference call. "Refineries can't handle the additional supply of light sweet crude. We don't have the capacity."

Production of low-sulfur diesel also set a record high, at nearly 14% more than for the first half of 2007. Included within that was a nearly 17% increase in output of ultra low sulfur diesel, the main fuel required for on-highway use.

With lagging gasoline demand, gasoline production for the six-month period was down about 1% from a year ago, but was still the second-highest amount ever for any January-June period, API said.

US crude inventories declined to 301 million barrels at the end of June, down 54 million barrels from last year's recent-year record and the lowest mid-year level since 2003. Gasoline inventories ended the month at 212 million barrels, up 3.6% from a year ago, while distillate inventories slipped 3% from a year ago to 120 million barrels. However, inventories of ultra low sulfur diesel were up more than 8% from a year ago.

The first half's domestic crude production slipped 2.2% from a year ago. Production in the Lower 48 states fell 2.1% to average 4.4 million b/d, even with year-to-year increases in some regions of the country. Alaska crude output was down 6.4% for the first half, averaging 725,000 b/d for the first six months.

Earlier this week, President George W. Bush lifted the executive moratorium on offshore coastal oil drilling, leaving in place only the Congressional ban on drilling, which must be renewed by September 30. The Outer Continental Shelf may contain as much as 86 billion barrels of oil that could be extracted, according to the US Minerals Management Service.

Created: July 22, 2008

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