Citing poor refinery margins, Verleger argued that producers need to cut crude production. "Some country or combination of countries needs to reduce output two million barrels per day," he said. "The cuts should take effect October 1, 2009."
Because margins are so poor, demand for crude will sink, and prices will not hold in the $65-75/barrel range cited by technicians. "OPEC, the IEA, and the 'experts' cited by the major financial newspapers may see balance in the world crude market. Refiners do not. To be exact, they see nothing but red ink," Verleger said. "In these circumstances they curtail runs."
Verleger points to a weakening 3:2:1 crack spread on the NYMEX, which settled at $2.28/b on September 25, the 69th smallest of 1,239 observations dating back to January 1986. "[I]t is in the fifth percentile...This is bad, very bad," he said.
Verleger cites not only poor product demand but mounting global inventories of distillate and gasoline.
"Under today's market conditions, buyers should gamble that producers (particularly OPEC nations) are 'unwilling to hold.' Sit back and wait. Prices will fall," Verleger concluded. "While you wait, think of all the favors the sellers did for you in early 2008."
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