There was a time when any pronouncement on the oil market from Vienna, home of the Organization of the Petroleum Exporting Countries (OPEC), was parsed with nearly the same care as a Federal Open Market Committee announcement. The cartel continues to dutifully supply the monthly reports, but they don’t get much attention.
The primary reason for that is the close relationship that OPEC’s de facto leader, Saudi Arabia, has formed with Russia. The Saudis have long gotten their way in decisions about OPEC production levels with only a little noisy pushback from main antagonist Iran. Now that Iran is once again the subject of harsh U.S. sanctions, even that voice has been reduced to a whisper.
In early July, Russia and Saudi Arabia agreed at a G20 ministers meeting in Osaka, Japan, to further cuts in crude production ahead of the regularly scheduled OPEC meeting set to begin the following week in Vienna. OPEC’s monthly reports have become just another data point with no special meaning to oil markets.
What is now important is the state of the global economy. In its August report, OPEC forecast global demand to rise year over year by 1.1 million barrels a day in 2019 to 99.92 million barrels and to rise by 1.14 million barrels a day in 2020 to 101.05 million barrels a day. There is a catch, however:
This forecast is subject to downside risks stemming from uncertainties with regard to global economic development. The OECD region is estimated to be in positive territory in 2020 as OECD Americas is projected to show growth, while OECD Europe and OECD Asia Pacific are projected to decline. However, non-OECD countries are forecast to continue to account for most of the growth at 1.05 mb/d. China and Other Asia are anticipated to lead demand growth both in the non-OECD region.
Except for the bit about demand slowdowns in Europe and Asia Pacific, the rest of this could just be wishful thinking. Demand for crude oil in the Americas is down half a point this year (98,000 barrels a day), according to the cartel’s August report. Gasoline demand is down 1.6% (149,000 barrels a day) and diesel oil demand is down 5.4% (232,000 barrels a day).
The U.S. Energy Information Administration (EIA) reported Friday that U.S. refinery runs have fallen for the first time in 10 years. Gross input to refineries is expected to drop from a record-high 17.3 million barrels a day last year to 17.0 million in 2019. U.S. refining capacity in July was 18.8 million barrels a day, and even the fire at Philadelphia’s PES refinery only reduced that total by 335,000 barrels a day.
Even more likely to affect OPEC’s rosy forecast for the Americas is the end of the summer driving season in the United States. In another two weeks, U.S. kids are going back to school and families are not going to be traveling much. Not that they have been in the first place. Last week the U.S. stockpile of crude oil rose by 1.6 million barrels, while gasoline stockpiles fell by 1.4 million barrels. But commercial crude inventories remain 3% above the five-year average for this time of year, and gasoline inventories remain 4% above the five-year average. Supply is up, demand is down and pump prices are 22 cents a gallon lower than they were last year at this time.