Economic outlook remains cloudy

Sam Fletcher
Senior Writer

In the final days of March, market analysts saw some indications that the economic crisis might be nearing bottom and could perhaps rebound in the second half of this year.

The Commerce Department reported that consumer spending increased by 0.2% in February. Analysts at Pritchard Capital Partners LLC, New Orleans, noted Mar. 20 that crude prices had gained more than $20/bbl, or 59%, from earlier lows of $33.98/bbl, while Department of Energy data for 2 of the previous 3 weeks showed increased US demand from 2008 levels. The average US retail price for conventional gasoline climbed to $2/gal for the first time since November.

Still, Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said, "The global economy is in worse shape than the consensus expects, but…the world can avert a 1930s style downturn. We expect the energy and industrial metals complex eventually will be the major beneficiaries of an improving economic outlook."

In its Mar. 30 weekly report, the Centre for Global Energy Studies (CGES) said Mideast Gulf liftings are at a 6-year low, averaging 16.4 million b/d in March, down more than 1.5 million b/d from last year's high. Most of that falloff has occurred since December, but the long lead-time between oil being lifted in the Middle East and arriving off the coasts of consumer countries means the full impact of production reductions has yet to be felt in North America and Europe.

However, CGES analysts see "little clear evidence" that producers have been turning customers away. Oil supplies still in floating storage "suggests producers have cut production in response to falling demand from refiners," they said. Although the Organization of Petroleum Exporting Countries OPEC remains committed to the lower production quotas agreed in December, CGES analysts said, "It is unlikely that Mideast Gulf liftings will fall much further, as the Gulf Arab states are already near full compliance, while Iran is unlikely to cut its output much further."

Inventories rising
Meanwhile, inventories of crude and petroleum products continued rising this year in the US, EU16, and Japan but remain below the levels of 2006-07. Increased domestic production has increased US crude stocks despite a drop in imports. "Crude oil stocks in Europe and Japan fell by 7 million bbl in January and February and are down by a further 10 million bbl in Japan, where the economy is shrinking at a rate not seen since the 1970s," CGES said. Imports will fall further as OPEC reductions progress down the supply chain.

"Refined product stocks have risen as demand has weakened, but this is easing as refiners cut runs in response to weak margins. If weak margins persist and throughput continues to be low, any upturn in demand could see refined product stocks begin to fall from current highs," CGES reported.

Global refining runs historically decline from January through April or May, as refiners in the US and Europe do seasonal maintenance in preparation for the summer months, when demand for gasoline is dominant. But this year, CGES said, January throughputs in major refining centers were down more than 2.5 million b/d (5%) from a year ago because of poor profit margins due to the sharp falloff in demand.

"Even a 700,000 b/d increase in February, primarily in Europe, leaves runs 1.7 million b/d (3%) down on the same month last year. It seems unlikely that this upward trend will continue, with major refiners in the US and Asia announcing extended maintenance closures and run cuts in the second quarter," said CGES analysts.

Meanwhile a sharp drop in middle distillate margins in major refining centers suggests that demand for diesel, a key indicator of economic activity, is shrinking globally. Gas oil stocks in Singapore are climbing due to increased exports from China, South Korea, and Japan. "Chinese state refiners will be allowed to export 680,000 tonnes of diesel tax-free in the second quarter to help reduce Chinese stocks," CGES reported. "Independent gas oil stocks in Rotterdam have risen to around 17 million bbl as supplies from Russia increase and European demand for heating fuels drops. US distillate stock levels fell in the week ending Mar. 20…but are still well above the 5-year average. Until economic activity picks up, or refinery throughputs fall even further, margins will remain weak."

Jacques H. Rousseau, an analyst at Soleil-Back Bay Research, reduced his estimates of 2009 earnings at six refining companies primarily due to the sharp decline in refining margins in March and the potential for increased gasoline imports during this year's second quarter.

(Online Mar. 30, 2009; author's e-mail: samf@ogjonline.com)

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