The Unbearable Lightness of Being a Refiner
If there is one thing the oil world's chief prognosticators can agree on, it is that global demand is going up by more than a million barrels a day this year. Both the International Energy Agency and the Energy Information Administration put growth at about 1.4 million barrels a day; OPEC has it at 1.2 million.
There's just one problem: Refiners, the biggest buyers of crude oil, aren't buying it.
The IEA drew attention to the issue in its latest monthly report on the oil market -- provided you read all the way through to page 44, that is. In a section titled "The burden of the light-hearted demand growth," the IEA pointed out that "oil" isn't always oil, a disconnect that has been widening.
Yes, "oil" as a term is as slippery as the stuff it describes. While headline demand is about 96 million barrels a day, about 16 million of that isn't actually crude oil that has been processed into fuels and other products by refineries.
Some of the gap isn’t really a problem for oil demand; for example, some crude is simply burned directly to generate electricity in places such as Saudi Arabia.
But the biggest part of that gap is made up by natural gas liquids. These are lighter than crude oil and include liquefied petroleum gas (the propane you use to fire up your grill, for example) and ethane for chemical plants. By-products of natural gas production, they don’t go near a refinery.
This isn’t a new development (see this column from March). What is interesting is that the IEA now feels the need to devote a section of its report to explaining it.
With demand for products derived from natural gas liquids growing at roughly twice the pace for traditional refined products such as gasoline and diesel, those headline oil demand numbers deserve closer scrutiny. As the IEA puts it (ever so drily):
Refinery throughput growth is decoupling from demand growth, both seasonally, and structurally, resulting in the need for a more nuanced interpretation of headline oil demand numbers.
The IEA projects the world’s refineries will process 79.6 million barrels a day of crude through the first nine months of this year. That’s about 660,000 barrels a day higher than the same period in 2015 -- far below the 1.39 million barrel increase in headline "oil" demand.
Indeed, refineries’ appetite for crude has been lagging overall oil demand throughout the year, something that hasn’t happened since 2013, according to analysts at Morgan Stanley. Far from the touted growth forecasts of 1 million-plus barrels a day, they now think their existing projection of 800,000 barrels a day of extra crude oil demand in 2016 could be too high.
Judging by what’s happened to crack spreads -- a rough benchmark for refining gross margins -- those analysts may well be right. Inventories of traditional products such as gasoline and diesel are bloated, weighing on margins and eroding the rationale for keeping refineries running. Expect more of them than usual to take a breather this fall -- with all that entails for the fitful recovery in crude oil prices.
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