Imbalances in global refining output and refined products demand are helping to keep oil prices high, the International Energy Agency (IEA) suggested.Oil demand was higher than expected in Q1 probably due to colder weather in Europe than in the year-ago period, it said. The agency raised its 2015 demand forecast to 1.4m bbl/day as a result but added the momentum of demand growth is expected to slow in the second half.

On a global basis, oil supply fell month to month in May, but was a steep 3m bbl/day higher than in May 2014. Major oil producers are pumping away – Saudi Arabia, Iraq and the UAE were producing oil at a record monthly rate sufficient to keep output more than 1m bbl/day higher than OPEC’s official target for the third month in a row, the IEA said.

“The estimate of global demand growth has been revised up to 1.7m bbl/day for Q1 2015 and 1.4m bbl/day for 2015 as a whole. Momentum is expected to ease somewhat in H2 2015, assuming a return to normal weather conditions and given a recent partial recovery in oil prices ,” it added.

Its market commentary for the month pointed to one possible reason behind higher oil prices in an oversupplied market. “Delayed new capacity of 1.5m bbl/day in non-OECD regions has lifted product cracks and OECD refining utilisation rates, and caused backwardation to reappear in oil products markets,” it said. “Short-term imbalances in the global refining industry appear to be supporting oil prices – whether directly for products or more indirectly for crude – in the face of a lingering supply overhang, the latest available data suggest.”

Crude pricesand market fundamentals appear to be disconnected but maybe they aren’t. Downstream supply and demand doesn’t always feature strongly in crude analysis but it is in refining that the answer to the conundrum might lie.

It is hardly surprising that downstream trends ultimately have an impact on crude prices but those trends aren’t always so markedly apparent. In 2008, refinery capacity tightness underscored a rally in diesel and helped push crude prices to record highs. A collapse followed.

But is there a more deep-seated factor underpinning higher prices since the start of the year? Oil companies have made deep cuts in capital spending in response to the drop in oil prices in the second half of 2014.

It will take time for the impact of those cutbacks to be felt in potentially tighter conventional crude supply but the suggestion is that market could already be compensating for them.
Source: ICIS