OPEC’s oil output rose to 30.459 million b/d last month, with Iraq and the GCC members accounting for the bulk of the increase. This is an awkward moment for supply to be rising, however, given the thoroughly downbeat tone of the group’s latest market outlook. Although the forecast call on OPECs crude for this year may have inched up, to 29.8 million b/d, worries about China and the other BRICs are creeping into the group’s thinking.
“A vulnerable global economy” showing prospects for only “moderate demand growth” has come alongside rising crude production: that’s the way OPEC explains the sell-off in crude-oil markets in recent weeks. While last month’s market report painted a rosier-than-consensus view of China’s economy, this month’s is less sanguine. You don’t have to look hard for the reasons: China’s industrial output remains disappointing and the country’s transition from an economy depending on exports to one relying on internal demand could yet be rocky.OPEC has picked up other bearish signals, too. It sticks with its forecast of non-OPEC supply, which it expects to rise by 1 million b/d this year (twice the rate at which it grew in 2012); and on the demand side it sees many risks:
In the tanker market, a general bearish sentiment could be seen in both dirty and clean markets in April due to low tonnage demand. On average, dirty spot freight rates dropped by 4% from the previous month. The drop in freight rates was mainly driven by lower demand on refinery maintenance and the end of the winter season. OPEC and Middle East sailings declined from previous month, along with arrivals in all reported ports.
Above all, the report’s language suggests some concern in the Secretariat about how the poor macroeconomics will weigh on global demand in the coming months, especially as the BRICs hit a rough patch (see graphic). Says OPEC:
While at the beginning of the year it looked as if further momentum was building up, the continued decline in the Euro-zone, the significant deceleration in the first quarter in some of the Asian economies and the recently acknowledged slow-down in Russia all have the potential to again push growth down slightly further. This recent deceleration has also become obvious in the continued slowdown in global industrial output, which began in May 2010 and has been mainly due to lower growth in the industrialized economies. In the major emerging economies, some further stimulus measures might provide upside support. However, given rising inflation levels, central banks and policymakers alike will be careful in pursuing such a policy. China is likely to consider the 1Q13 growth level of 7.7% as reasonable, as it is higher than their official forecast for the year of 7.5%, although below the MOMR forecast of 8.0%. India has continued lowering its key policy rate in April in order to provide some momentum to its economy, which is forecast to grow at around 6.0%. However, elsewhere, the most recent data indicates a more severe slow-down in 1Q13 in many of the Asian economies and the latest PMIs for April point to a continued deceleration.
Two graphics taken from the report sum up some of the worry:
It leaves the group facing a familiar conundrum as it heads into the 31 May meeting in Vienna. The hawks will make the now-familiar call for tighter observance of the 30 million b/d target, citing OPEC’s own grim view of the macroeconomic backdrop. Their argument will be almost identical to the one made before the summer meeting in Vienna last year: if demand is to weaken further — a conclusion that can be drawn from the myriad bearish forces the Secretariat sees around the world — then OPEC should be tightening supply to prevent a slide.
The doves, led by Saudi Arabia, will make the counter argument, saying demand will rise along with the arrival of northern hemisphere’s driving season; and, anyway, the last thing struggling oil-consuming economies need is the risk of an oil-price jump if OPEC takes some supply off the market. (And OPEC wouldn’t want to cop the blame for that, either.)
The crucial point, however, is that the doves are the ones who would do the cutting anyway. Hawkish Iran, Algeria and Venezuela can’t afford to. Iraq, the other one, sees ever-rising supply as a birthright. So cuts are not yet on the agenda, despite the all-too-predictable early call for them from Iran.
In the meantime, don’t be distracted by news of rising Saudi supply. It means neither that demand is more robust than it looks, nor that the kingdom is making a policy statement. Refineries are coming out of maintenance in Asia and the buyers are going back to their supplier. When the Saudi air conditioners kick in (Riyadh was hit by rain and hail storms while PPI visited last week and temperatures are still relatively mild), oil burn will also push up the production figures. For now, Saudi Arabia is quite content with prices where they are. Stability will be its watchword as the Vienna meeting nears.