OPEC’s Banking on a Christmas Miracle
OPEC’s latest communique to an oil market mostly on vacation (or wishing it was) is almost a master class in positive spin. Almost.
It begins with all the right phrases: “critical value”, “commitment”, “market stability”. These tee up the main message, which is that OPEC+ members are going above and beyond their pledge to withhold supply in order to support oil prices. Compliance was a robust 159% in July, according to the group, bringing the average for the year so far to 134%. In other words, fret not oil bulls, OPEC & Co. have your back.
Things run into trouble soon after that:
The JMMC [Joint Ministerial Committee] underscored the growing importance of the Declaration of Cooperation in supporting oil market stability, which along with ongoing healthy oil demand so far has arrested global oil inventories growth and should lead to significant draws in the second half of the year.
It’s that “ongoing healthy oil demand” that sets a bell tinkling faintly somewhere in the back of the brain. Because global oil demand increased by only about 650,000 barrels a day in the first half of 2019, year over year, according to figures from the International Energy Agency. That is the weakest showing since the latter half of 2016, which was when OPEC+ first agreed to its six-months-going-on-three-years cuts. Even worse, none of that growth pertains to crude oil, with refinery runs having actually declined by about 100,000 barrels a day in the first half of the year compared with the same period in 2018.
OPEC rounds out the upbeat message by noting that forecasts for oil-market fundamentals remain robust for 2019 and 2020. It’s worth noting OPEC’s own forecast for growth this year has dropped by 400,000 barrels a day since January. More importantly, forecasts from OPEC and the IEA are starting to feel a little like letters to Santa.
Because the first half sucked wind, those “robust” full-year figures now bank implicitly on a big finale. The IEA’s projection has demand rising by 1.6 million barrels a day in the second half, and maintaining solid growth of 1 million-plus through the first and second half of 2020:
The scale of the turnaround becomes even more obvious when you look at sequential growth, from half to half:
Even on a percentage basis, those figures for the second half of 2019 and 2020 would be the highest since 2012. And yet it is tough to discern the basis for such optimism. Oil prices are up a bit on reports that President Donald Trump made some conciliatory noises about China at the Group of Seven meeting in France. But coming days after Friday’s trade-war escalation crushed oil prices, Tuesday’s little jump has the air of a dog merely thankful for avoiding a kick from its master. Sure, a breakthrough on trade is always a possibility. But the breadth of the confrontation between the U.S. and China, and the peculiarly erratic approach of the White House, make that an unlikely base case. The risk skews down, not up.
Once again, it is worth noting that even in those optimistic projections for the second half, actual refinery runs of crude oil are expected to rise by just 700,000 barrels a day. Virtually all of that relates to the fourth quarter. As 2019 wears on, forecasters are pushing a year’s worth of faith into a matter of months. Which is precisely why OPEC+ is having to cut so much supply in the first place. After all, when a market is doing well on fundamentals, you don’t need a press release to shout about it.