The latest OPEC monthly report could be read as bearish, offering some hope to beleaguered consumers. But its bearishness rides on the outcome of one development that has consistently disappointed: non-OPEC output.
In its report, released Tuesday, OPEC said global markets would require 710,000 b/d less oil from the organization's members next year. It forecast that demand for OPEC crude would decline to 31.24 million b/d from 31.95 million
b/d in 2008. The equation OPEC forecasts is increased non-OECD demand minus decreased OECD demand plus rising non-OPEC output equals a reduced call for OPEC crude. OPEC forecast a rise in non-OPEC supply of 900,000 b/d.
That's where there's a bit of a leap of faith. The International Energy Agency, for example, seems to revise downward its projections for non-OPEC output almost monthly. OPEC followed suit in its July report. It said
non-OPEC supply would rise this year by 600,000 b/d, "which represents a downward revision of around 112,000 b/d from the last assessment, primarily due to lower output from Brazil, Russia and Mexico."
To read the report, you'd never know that OPEC members are making so much money that some of their sovereign wealth funds have bailed out cash-strapped US financial firms in recent months. It seems to be nothing but gloom and doom, at least from a producer's perspective.
"The economic slowdown and high pump prices in OECD [countries] have been impacting oil demand and will continue to do so next year," OPEC said in its report. Reduced demand for gasoline, particularly in the US, along with an easing in distillate markets and expensive crude, had exerted pressure on global refining economics, according to the report.
But if there's an "easing" in the distillate markets, it's hard to see. Prices across the board in the distillate complex -- heating oil, jet and diesel, especially the latter -- have not "eased," relative to crude or gasoline. It can be argued that they are holding up the entire petroleum complex, with the NYMEX No. 2 oil contract continuing to outpace crude.
It is true, however, that the strong diesel market and the weakening gasoline market are turning refining economics on their head. It had always been a very clear rule at a refiner: set up your system to maximize gasoline production. But refiners now want to produce more diesel and less gasoline, but there's only so much tweaking they can do to their units to make that happen.
The end results are weak refining margins produced by extremes at both ends: strong diesel and weak gasoline in a gasoline-oriented physical environment. OPEC did correctly see where this might lead. It warned that if these trends continued, refiners might be encouraged to cut throughputs or begin seasonal maintenance earlier than usual. It said that move would result in lower crude demand.
But it also would result in lower diesel output, and since diesel has been such an enormous driver in this market, the lower crude demand envisioned in that scenario might not be enough to offset one more tightening of the screw in the distillate market.
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