Deutsche Bank: OPEC needs to cut output

With global oil and product inventories high and with demand deteriorating, OPEC members needs to further cut crude output, according to Deutsche Bank analyst Adam Sieminski.

Marilyn Radler
Senior Editor-Economics

HOUSTON, May 8 -- With global oil and product inventories high and with demand deteriorating, the Organization of Petroleum Exporting Countries needs to further cut its crude output, according to Deutsche Bank analyst Adam Sieminski.

Despite this, Sieminski writes in a new report that OPEC is unlikely to lower its exports because prices have been rising. For the week ending May 1, US demand for motor gasoline climbed less than 5% from a year earlier, while for the preceding week demand was up 8%, and a month ago it was up over 10% from a year earlier, indicating the onset of a downward trend in the demand growth rate, Sieminski wrote.

Momentum in the demand rate for distillate fuels as reported by the US Energy Information Administration also decreased during the latest reporting week.

Although gasoline inventories, measured in terms of days of forward cover, look relatively normal, oil and gasoline inventories are very full, Sieminski said.

He added that crude prices recently have been driven higher by a combination of rising expectations for a faster economic recovery, increased funds flow into commodities, and higher utilization at US refineries, which were up 2.6% this week to 85.3%—the first rise since January. This rise in utilization shows refineries are gearing up for the US driving season, which begins on May 25.

Sieminski believes that gasoline cracks are holding on tertiary stocking and could come under pressure when that stocking runs its course.

"Eventually, in our view, refiners will have to scale back, and this will force crude oil back to $50/bbl," Sieminski said.

Deutsche Bank estimates that WTI will average $47/bbl for 2009, rising to average $55/bbl next year.

Meanwhile, the Deutsche Bank US natural gas forecast calls for an average of $4.50/MMbtu this year, rising to $6.50/MMbtu next year.

Contact Marilyn Radler at marilynm@ogjonline.com.

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