There was an overlooked EIA report yesterday that highlights a significant change in global oil demand fundamentals that should continue in future years. Yesterday, we tweeted [LINK] “Good @EIAgov report “Saudi Arabia used less crude oil for power generation in 2018” replaced by nat gas/fuel oil. Est net >0.2 mmb/d less oil after increased fuel oil. Negative for oil, Saudi has more flexibility to increase exports in peak summer”. Saudi Arabia normally uses ~0.5 mmb/d more crude oil for electricity in its peak summer months vs winter. But the big change was in 2018, and the EIA estimates that Saudi Arabia’s consumption of crude oil for electricity in the summer peak season was ~0.3 mmb/d less than prior years. Part of that saving is being offset by ~75,000 b/d increased fuel oil consumption for electricity, the balance by natural gas. But there is a compounding negative because it means that Saudi Arabia now has the flexibility to allocate these net oil/fuel oil savings to increase oil exports by >0.2 mmb/d in the summer.
Global oil demand always has its biggest QoQ increase in Q3 every year. Every year, global oil demand follows a seasonal pattern. The low demand period every year is Q1, which is normally fairly flat to the preceding Q4. Then oil demand starts to pick up slightly in Q2, but the big increases in oil demand are every year in Q3, and Q4 is normally flattish to Q3. The forecasts for 2019 fit this pattern with Q3/19 oil demand expected +1.1 mmb/d QoQ vs Q2/19. One of the most common reasons given for the strong season increase in oil demand every summer is that its the peak driving season in the US and other countries. In the US, Q1 is always the lowest miles driven period each year and the pattern is always similar to 2018. The US Dept of Transportation “Traffic Volume Trends” [LINK] estimates for total individual monthly motor vehicle travel in the US were 737.8 billion miles in Q1/18, 836,0 billion miles in Q2/18, 838.6 billion miles in Q3/18, and 810.5 billion miles in Q4/18. The increased US driving demand starting in Q2 is why the major US refinery turnarounds (low oil demand period) tends to be in Feb/March every year, and why US refinery demand for crude peaks in Q2 and Q3.
Saudi Arabia is the best example of why oil demand is up big every summer. It doesn’t get the same attention as peak driving season, but Saudi Arabia is the best example of why oil demand is up big in the summer time as it is the hot season in Saudi Arabia, which means that Saudi Arabia’s consumption of oil for electricity generation always peaks in the summer. Simply put, it’s the hot season in Saudi Arabia and it drives air conditioning demand. Prior to 2018, this was almost exclusively powered by crude oil. In the 2013-2017 period, Saudi Arabia oil consumption for electricity was normally close to +0.5 mmb/d higher in the peak summer months vs Q1 months. We have probably highlighted this Saudi seasonal oil for electricity trend dozens of times over the past few years as a key reason why it is difficult for Saudi Arabia to ramp up oil exports in the summer – it needs way more oil for electricity generation.
But Saudi’s use of crude oil for electricity in the summer was dramatically lower in 2018 and expected to continue accordingly in 2019. There was a key new report yesterday that didn’t seem to get much attention, but is significant as if there was news that Saudi Arabia increased oil production by 400,000 b/d. Yesterday, the EIA posted a blog “Saudi Arabia used less crude oil for power generation in 2018” [LINK]. EIA reported on JODI (Joint Organizations Data Initiative) data for Saudi Arabia that shows dramatically less Saudi use of crude oil for electricity generation in the summer. The EIA didn’t provide the reasons why, but there was also a displacement of oil by natural gas and fuel oil for electricity. OPEC’s Monthly Oil Market Report May 2019 [LINK] said “Generally, policies focused on reducing subsidies for electricity in the residential and industrial sectors were a major factor in falling consumption levels in Saudi Arabia in 2018. This is expected to continue in 2019.” This is a major change from prior years. The EIA estimates Saudi Arabia used approx. 0.3 mmb/d less oil for electricity in summer 2018 compared to the 2013-2017 average for the normal peak summer months vs winter months. Plus, it shows difference in summer peak vs winter lows of only approx. 0.25 mmb/d, which is down from the 2013-2017 average difference of approx. 0.5 mmb/d. This is a major reduction in oil for electricity in the summer than in prior years. And it is a change to demand fundamentals that should continue in future years.
It means that Saudi Arabia should use >0.2 mmb/d less crude oil/petroleum products for electricity generation this summer. As noted above, we expect Saudi Arabia to use approx. 0.3 mmb/d less crude oil for electricity generation this summer. However, the EIA also notes that part of the displacement will be from using fuel oil. And the EIA graphs suggest that fuel oil consumption for electricity generation is likely 75,000 b/d higher than prior years. This means that net less lower oil + fuel oil used for electricity generation this summer will be approx. 225,000 b/d vs the 2013-2017 average. This would seem to tie to increased Saudi Arabia use of natural gas for electricity generation.
The compounding negative is that Saudi has more flexibility to increase oil exports by an additional >0.2 mmb/d. We believe the impact on global oil markets is actually worse than Saudi Arabia using >0.2 mmb/d of crude oil for electricity in the summer. We would say double negative but we don’t’ want anyone to think two negatives make a positive in this case. Rather there is a potential compounding negative for oil prices is that it means that Saudi Arabia has more flexibility to increase oil exports if it wants to increase exports because it doesn’t have the same seasonal increase as normal. It can now increase oil exports by an additional >0.2 mmb/d ie. its effectively a potential 0.4 mmb/d swing to global oil supply/demand impact. Let’s hope Saudi Energy Minister al Falih is right with his comments yesterday that he expects OPEC+ cuts to continue in H2/19.