The sharp drop in US product deliveries in the wake of Hurricanes Katrina and Rita has sparked speculation about demand destruction, but the data "must be interpreted with caution," said Paris-based International Energy Agency in a Nov. 10 report.
The disruptions caused by the hurricanes may have created mistakes in data. "Analysts have been searching for anecdotal indications, including road-toll receipts, to confirm the reported slowdown in oil use. But, so far, there is little evidence that provides a conclusive or country-wide answer," IEA observed.
"What really matters is whether lost oil production in the Gulf of Mexico can be offset by other changes in supply or demand," IEA analysts said. "Since August, the US has (understandably) contributed the biggest adjustments to the global oil balance, but it is the demand data which have sparked the most debate."
IEA said: "The US market is set to change: October saw more refinery capacity off line than crude production capacity, but the gap is narrowing sharply. US crude demand will increase, but compensatory throughput elsewhere will simultaneously decline. While there will be a shift in crude oil demand as simple refinery capacity is replaced with more sophisticated units, the main change will be a seasonal increase in runs to meet winter heating needs."
Unusually warm weather and hurricane disruptions temporarily reduced September-October demand among members of the Organization for Economic Cooperation and Development. However, IEA said, "This was partly offset by an 8.6% increase in Chinese apparent demand in September as monthly gasoline exports fell sharply." IEA lowered its estimates of global demand growth by 70,000 b/d to 1.2 million b/d in 2005 and by 90,000 b/d to 1.66 million b/d for 2006.
Crude prices weakened in October as spot and futures markets for benchmark US and North Sea Brent crude closed below $60/bbl. Weaker product prices, notably for gasoline, led the decline. Refining margins fell sharply throughout October in the US, pressured further by returning capacity. European and Asian margins were more stable but broadly weaker.
The flexibility of the world refining system was demonstrated as OECD refinery throughputs rose 59,000 b/d year-on-year in September to 38.5 million b/d. Increases of 427,000 b/d in Europe and 625,000 b/d in the Pacific more than offset the hurricane-induced fall of 993,000 b/d in North America, IEA reported.
"With crude and product prices now below prehurricane levels and refinery and crude capacity returning, the market appears to have weathered the worst of the storm. But while spot prices are below their peaks, it must not be forgotten that just a few months ago $60/bbl crude prices reflected extreme market tightness. Moreover, there is potential for further tightness to emergeparticularly if the weather turns cold and recent buoyant economic growth continues," IEA said.
In response to the IEA report, analysts at Friedman, Billings, Ramsey & Co. Inc. said, "The fundamental supply-demand tightness remains relatively unchanged, in our view, and we reiterate our outlook for sustaining high commodity prices."
Global crude supplies increased by 865,000 b/d to 84.4 million b/d in October. Half of the increase came from North America, with initial slow recovery after recent hurricanes and increases from offshore Canada and Alaska contributing. Significant October increases are also estimated for the North Sea, Russia, Brazil, Vietnam, and China. IEA noted that 740,000 b/d of US Gulf of Mexico production was still offline in early November, "with full recovery likely to take many months."
IEA analysts said, "Provisional production data for the US covering the June-September period now suggest lower baseline production ahead of the arrival of Hurricanes Katrina and Rita. Although monthly Gulf of Mexico data are only available through June, the implication is that [gulf] production itself was running some 40,000 b/d lower than expected in third quarter."
IEA foresees "a continued shift away from OECD production and towards the non-OECD regions." A 100,000 b/d reduction in projected 2006 OECD supply (USA and
Canada) is expected to be countered by a 125,000 b/d increase for non-OECD producers, particularly Azerbaijan, Thailand, China, Oman, and Yemen.
Production from the Organization of Petroleum Exporting Countries remained at 29.6 million b/d in October as increases from Iran and Kuwait offset a 220,000 b/d decline from Iraq. OPEC crude supply averaged 29.6 million b/d in October, while its production capacity totaled 31.8.million b/d. IEA officials estimate the fourth-quarter call on OPEC crude at an average 29.6 million b/d.
IEA said OPEC sustainable capacity could reach 32.1 million b/d at yearend and 33 million b/d by the end of 2006, with the bulk of short-term additions comprising lighter, sweeter material.
(Online Nov. 14, 2005; author's e-mail: email@example.com)