There wasn’t much good news for oil — and specifically diesel — consumers in the latest monthly report of the International Energy Agency released Wednesday.
With few major revisions in supply and demand estimates from its report released in August, the closely watched report did highlight the imbalances in crude supply and demand as well as the markets for products — with particular emphasis on diesel — that is sending global crude benchmark Brent to more than $90 per barrel, with $100 increasingly in sight.
Brent settled Tuesday at $92.06, its highest settlement since November. It is up almost $9/b since an Aug. 23 settlement of $83.21. U.S. crude benchmark West Texas Intermediate settled at $89.47/b.
The end-of-year deficit between expected demand and projected oil supply — a figure that includes not just crude but natural gas liquids and biofuels — remains a wide chasm.
The IEA projects global oil demand and output from producing nations that aren’t members of OPEC. That includes the members of the OPEC+ group that aren’t members of OPEC but have agreed to restrain production in conjunction with OPEC. OPEC+ output is restrained by a broad groupwide cutback that went into effect in April and an additional 1 million barrel per day cut in Saudi supply on top of that, in effect since July.
The IEA does not project OPEC output. Instead, the IEA produces a “call” on OPEC crude output, which is the amount of crude OPEC needs to produce to balance the market, given projected demand and supply from all the producing nations of the world. It combines the OPEC call with its estimate of non-OPEC members of OPEC+ to produce a total OPEC+ call. And that’s where the problem comes in.
According to S&P Global Commodities Insights (SPGCI), OPEC+ produced 40.52 million b/d of crude in August. That was up slightly from 40.4 million b/d in July. But the latest IEA report puts the call on OPEC+ supplies at 44.1 million b/d for the third quarter, 43.9 million b/d for the fourth quarter and a full-year 2024 average of 43.4 million b/d.
If the August output were to hold through the fourth quarter, it would mean that the deficit between global supply and demand would be about 3.4 million b/d — every single day.
That would continue a trend that has seen global inventories declining for the past several months. And the projected deficit between supply and demand in the fourth quarter is greater than it was in August, when the IEA said that global observed inventories “plummeted” by more than 75 million barrels, which worked out to a deficit of 2.46 million b/d. That brought stocks down to a 13-month low, according to the IEA.
Ironically, the August decline came after a July increase of 9.1 million barrels, according to IEA data.
The agency reported stronger production out of several countries, including the U.S. But in an understatement, it also said the “Saudi-Russian alliance is proving a formidable challenge for oil markets.” August prices were “calm” for most of the month, the IEA said, but the Saudi decision to extend its 1 million b/d cut through the end of the year, combined with Russian cutbacks, “triggered a price spike in (Brent) above $90/b to a 10-month high.”
When the report turns to the market for oil products, there is heavy focus on diesel. Global refining margins as measured by the IEA are at eight-month highs, which are “symptomatic of the more structural problems of robust middle distillate demand growth, low product inventories, stretched supply chains and insufficient access to medium and heavy sour crude, especially for European refineries.” Those medium and heavy sour crudes are particularly hit by the cutbacks out of Saudi Arabia and are also rich in yielding diesel when processed in a refinery.
Even with refineries operating at extremely profitable levels, there has not been an enormous surge in the level of operations, the IEA said. Refinery utilization in the Western-style economics of the Organization for Economic Co-operation and Development (OECD) was 85% in July, the IEA said, a high for the year, but even that was 2 percentage points less than a year ago. Refineries in Europe and the combined Asia and Oceania are down 4 to 5 percentage points from a year ago.
“Factors limiting the refining industry’s ability to respond to shifting product demand and crude supply dynamics include the loss of Russian crude and feedstock imports and other crude supply dynamics,” the IEA said. “More broadly, G7 sanctions have stretched supply chains and contributed to increased product cracks as market pricing signals the need for additional product availabilities.”
The data on refining margins showed the strength of products, particularly for a crude that has strong diesel yield. For example, processing heavy sour crude — which is a thicker crude with high sulfur content — through a process known as coking produces a strong diesel and other distillate yield. In May, the average refining margin for a Gulf Coast refinery utilizing that process was $28.05/b. In August, it was $43.60.
The pandemic had a double whammy on global refining. The collapse in demand from COVID-19 was the final hit that led to some refineries closing, while construction of new refining capacity, much of it in Africa, Asia or the Middle East, was slowed. A balance hasn’t been reached yet, the IEA said.
“While the industry has added approximately 2.1 million b/d over the past 12 months, not all of this is running at full capacity yet,” the IEA said. “Capacity closures of 3.9 million b/d over the preceding three years have undoubtedly left a void that needs to be filled.”
Shifts in crude supply also have created disruptions. The IEA noted a drop in Russian crude and Middle East supplies, which are rich in diesel. Meanwhile, U.S. output has been rising, but the light sweet crude out of the Permian basin and North Dakota’s Bakken is good for making gasoline and not as favorable for making diesel.
One new development that came too late for the latest report: Libya. Libyan output has swung up and down for more than 10 years since the collapse of the Qadaffi regime. Just before the pandemic, SPGCI estimated Libyan production at 770,000 b/d. It was more than 2.5 million b/d before the collapse of the Qadaffi regime.
More recently, it has been near 1.15 million b/d. But devastating floods in the past few days, leading to the deaths of thousands, could have an impact on oil production that has been steady now for more than a year.
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