Crude demand may slow as gasoline cracks worsen – OPEC

LONDON (ICIS)–The decline in crude oil prices during past weeks may continue into September and the fourth quarter due to “lingering concerns” European and US refiners could cut their runs in the face of falling spreads between gasoline and crude oil, the Organization of the Petroleum Exporting Countries (OPEC) said on Wednesday.

The Vienna-based organisation of 14 crude producing countries said the crude referential prices had fallen by as much as $3.39 during July in the case of international referential Brent, to average $46.53/bbl during the month, while the US referential West Texas Intermediate (WTI) averaged $44.80/bbl in July, down $4.05/bbl compared to June.

“Lower-than-expected demand [during July], high refined product stocks, and rising crude supply were the factors behind the $3.16/bbl drop [in OPEC’s reference basket of prices]. Speculators cut long positions further this month in all markets,” said OPEC.

From the crude oil price lows seen in January, an easing in the global supply glut, strong consumption in several countries, declining production in many regions, some supply disruptions and a weaker US dollar, as well as the return of a significant increase in speculative long positions, all caused the price to rise to the low-$50/bbl by the end of June, according to OPEC.

“This rally faded amid concerns that the supply overhang in crude, and particularly refined products, would pressure prices, delaying a long-anticipated rebalancing in the market. Additionally, the outcome of the UK referendum and uncertainties regarding the timing of the UK’s exit from the EU impacted sentiment in the broader financial markets, including for crude oil.”

The oil producing cartel added that, despite the fall seen in crude prices during July, refining margins weakened at the same time due to high product inventories caused by the lower-than-expected increase in demand.

Crude prices have registered increases so far this week after OPEC announced on 8 August plans for informal talks in Algeria next month in order to explore options for production within its 14 member countries.

For the week ending 7 August, crude oil futures closed at $43.70/bbl for Brent October deliveries and $41.35/bbl for WTI September deliveries. At midday today, however, prices stood at $44.56/bbl for Brent and $42.28/bbl for WTI. 

Moreover, as the summer draws to a close in the northern hemisphere – and with it the high driving season – there exists “lingering concerns” that refiners in the US and Europe will cut runs to respond to declining gasoline cracks in both regions “in a period when summer driving and margins should have been at their highest”, OPEC said.

“This has been the major factor contributing to the downward pressure on crude prices in recent weeks… With the end of the driving season in 3Q16 [third quarter 2016], gasoline demand could see a seasonal downward correction,” it said.

“Meanwhile, the supply side could also continue exerting pressure on middle distillates as inventories remain high worldwide, especially in OECD [Organisation for Economic and Co-operation Development] countries, which are currently around 80m bbl higher than the latest five-year average.”

OPEC went on to say the advent of the winter in the northern hemisphere and increasing GDP growth expectations for some key economies, could lead to higher consumption in coming months.

At the same time, an increase in demand could see the ongoing contango in the Brent, WTI and Dubai markets continue to narrow, which would reduce the economic incentive to store crude and result in an easing of the global overhang of crude oil products. This may lead to an “expected rebalancing” of the market, said OPEC.

Compared to its Monthly Oil Report published in July, OPEC revised upwards its 2016 and 2017 GDP growth forecasts for Japan after the government announced a stimulus package to boost the economy earlier this month.

The upgraded figures, however, still place Japanese GDP growth at a meagre 0.9% for both years, up 0.2 and 0.1 percentage points respectively.

OPEC also revised Russia’s GDP growth forecast by 0.2% in 2016, although it said the country’s output will still decline by 0.8% on average during the year.

Lower-than-expected growth in the US during the second quarter prompted OPEC to reduce the country’s GDP growth forecast to 1.7% for 2016, while the GDP growth forecast for 2017 remains unchanged at 2.1%.

OPEC said the eurozone’s outlook remains unchanged, with GDP growth expected at 1.5% in 2016 and 1.2% in 2017.

“Forecasts for China and India are also unchanged at 6.5% and 7.5% [GDP growth] for 2016 and 6.1% and 7.2% for 2017. Both Brazil and Russia are forecast to rebound from two-year recessions in 2017 with growth of 0.4% and 0.7%, respectively,” said OPEC.

OPEC revised slightly upwards its world oil demand growth figures expected for 2016, which it believes will average 1.22m bbl/day during the year, 30,000 bbl/day higher than its Jue forecast.

It estimates that crude oil demand growth will ease slightly in 2017 from this year and will grow by an average of 1.15m bbl/day.

Supply will from non-OPEC countries is expected to decline in 2016 by as much as 790,000 bbl/day, said the crude oil cartel, although higher-than-expected output in the second quarter in the US and UK caused OPEC to reduce the expected decrease by 90,000 bbl/day compared to its June’s report.

“In 2017, non-OPEC supply is expected to decline by 150,000 bbl/day, following a downward revision of 40,000 bbl/day,” it said.

While non-OPEC countries lose ground in their crude production figures, those belonging to the Saudi Arabia-led cartel continue to increase their market share.
“OPEC NGL [natural gas liquids] production is forecast to grow by 160,000 bbl/day and 150,000 bbl/day in 2016 and 2017, respectively. In July, OPEC production increased by 46,000 bbl/day to average 33.11m bbl/day, according to secondary sources,” said OPEC.

Demand for crude from OPEC countries is expected to stand at 31.9m bbl/day in 2016, up 1.9m bbl/day compared to 2015, while in 2017 demand for crude produced within OPEC countries will stand, according to the organisation’s own estimates, at 33m bbl/day.

The world, however, still faces one of the largest crude oil overhangs it has ever seen. As of end of June, and despite a fall, commercial stocks in OECD countries stood at 3,045m bbl, higher than the five-year average by 311,000 bbl.