If you’re trying to figure out why the price of diesel is soaring, look no further than the first two pages of the International Energy Agency’s August report.
The closely watched monthly report on the world’s supply and demand balance can be summed up from two sentences in the opening summary.
“World oil demand is scaling record highs, boosted by strong summer air travel, increased oil use in power generation and surging Chinese petrochemical activity,” said the opening sentence of the IEA’s explanation of how much oil the world is consuming.
A few paragraphs later, on the supply side of the equation, the IEA said, “Global oil supply plunged 910,000 barrels per day in July.” That is a huge one-month decline. The primary reason is the combination of cuts the OPEC+ group implemented in April continued to take hold while Saudi Arabia’s cut of an additional 1 million barrels per day (b/d) began in July. Rising production out of countries that aren’t in OPEC+ could not offset that decline.
The IEA estimate of the decline in OPEC+ production was more conservative than the estimate of S&P Global Commodities Insights. That group earlier this week said the decline was 940,000 b/d.
The surge in demand can best be seen by comparing the August IEA report to what it published in July.
Last month, the IEA — a group that includes mostly oil-consuming countries with Western-style economies — estimated that global oil demand in the second quarter was 101.4 million b/d. In the August report, that estimate had risen to 102 million b/d, an enormous upward adjustment. The IEA is constantly adjusting its earlier estimates and forecasts based on new data, but rarely are the shifts that large; changes of 100,000 b/d are more frequent.
Third-quarter demand is expected to set another record, rising to 102.9 million b/d. But that forecast for a quarter that is essentially half over was reduced by the IEA from the 103.1 million b/d estimate in July.
The bottom line is that global oil demand is now seen by the IEA as likely to expand 2.2 million b/d over where it was in 2022. And for all the talk of a slow Chinese recovery post-COVID, as evidenced most clearly in a Wall Street Journal article Thursday that looked at deflation possibilities in that country, the reality according to the IEA is that China is going to account for about 70% of that growth.
And the expansion in demand is coming just as OPEC+ has put on the brakes. The OPEC+ group of nations, which includes OPEC and a large number of non-OPEC oil exporters nominally led by Russia, announced combined cuts in output of 1.16 million b/d in April. Saudi Arabia added to it with its 1 million b/d cut in July.
For the first two to three months after the OPEC+ cuts went into effect, the market reaction was one of gradual decline, with the world crude benchmark Brent dropping from about $85 per barrel at the start of April to a range of $71/b to $72/b by mid-June.
But as those cuts began to be felt in the market, and the Saudi cuts took hold in July, Brent prices have risen to settle at more than $87/b Wednesday before declining slightly on Thursday. Prices were slightly higher Friday morning after the IEA report was released overnight out of the agency’s Paris office.
The OPEC+ and Saudi cuts have been extensive enough to blunt rising production from other countries that didn’t sign on the agreement. The IEA said production out of those countries rose 310,000 b/d in July compared to June, on its way to the non-OPEC+ group tacking on 1.9 million b/d. Next year, that same group of oil producers that aren’t either in OPEC or OPEC+ will add 1.3 million b/d, led by the U.S.
Earlier this week, the U.S. Energy Information Administration forecast that U.S. output next year would close out 2024 at 13.4 million b/d. The most recent weekly data had that figure at 12.6 million b/d.
But that’s next year. This year, the supply and demand imbalance is leading to a significant draw in inventories. It can be seen in the U.S. data for ultra low sulfur diesel inventories. The average amount in inventory reported in the first weekly report of August for the 10 years through 2022 was 123.2 million barrels. This week the number reported was 106 million barrels, and the trend for the week was downward when it tends to be upward at this time of year.
The IEA summary of global oil inventories was that inventories in the Western economies of the Organisation for Economic Co-operation and Development saw a decline in inventories in June that was in line with seasonal normal. But more importantly, stocks already were low, according to the IEA, about 115 million barrels less than the five year average. “Preliminary data suggest global inventories drew further in July and August,” the report said.
The end result of these market conditions is that it is a great time for the refiners who turn these tight crude supplies into products. Refining has been a sector that lagged behind others for years, but that has changed.
The refining margins the industry is experiencing now “eclipses almost any other period except 2022,” which isn’t all that long ago but by itself was one of the strongest periods in refining margin history. The current market, the IEA said, “is reminiscent of 2005-07 when strong middle distillate demand growth combined with a lack of upgrading capacity underpinned exceptional margins for complex refineries.”
The IEA’s price data reflects just how strong margins have been for diesel production. On the U.S. Gulf Coast, the spread between diesel and West Texas Intermediate crude in Houston was $24.04/b in May, according to the IEA. It rose to $26.85/b in June and $31.65/b in July.
By contrast, a look back at the IEA report from four years ago shows refining margins on the Gulf Coast for all products totaled less than $10/b for most grades of crude.
The IEA does not forecast prices. It also does not forecast OPEC production but does forecast production of all other production except OPEC.
The challenges facing the market can be seen in the OPEC “call” in the latest IEA report. The call is calculated by taking estimated global demand, subtracting the IEA forecast for output from every nation except the 13 members of OPEC, leaving the estimate on the call on OPEC crude needed to balance the market.
IEA’s call for the next six quarters ranges from a low of 28.2 million b/d in the first quarter of 2024 to as much as 30.2 million b/d in the fourth quarter of both 2023 and 2024.
But with production restraints in place, the S&P Global estimate is that the members of OPEC produced just 27.34 million b/d of crude in July, well below the call going out until next year.
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