OPEC warns continuing weak crude demand will boost stock overhang

By Margaret McQuaile & Richard Swann

September 15 - Continuing weak demand for crude oil is likely to result in already brimming industry stocks being boosted further, OPEC said September 15.

The oil producer club noted in its latest monthly oil market report that while its production cuts had helped to reduce crude inventories, refined products now represented "more than 60% of the total overhang in stocks compared [with] only 20% in January."

"Since the start of the year, floating storage for both crude and products has also surged to more than 115 million barrels," OPEC said. "Although crude has begun to decline, products in floating storage have been increasing, reaching around 60 million barrels."

But OPEC said that although crude inventories had dropped, the end of the driving season and the start of refinery maintenance and continuing low throughputs meant that demand for crude was likely to remain low in the coming months.

"This is likely to lead to lower-than-typical seasonal stockdraws resulting in a further increase in the overhang," it said, adding that a colder-than-normal winter would not be sufficient to remove the "massive accumulation" in stocks of middle distillates, not least because part of winter demand may be met by natural gas.

"This could lead to an additional build in OECD commercial stocks, which currently stand just below the highest level reached in the third quarter of 1998," it said.

Ministers agreed last December to remove 4.2 million b/d of oversupply from world markets, setting a target of 24.845 million b/d for the 11 members bound by quotas but not Iraq.

Enthusiasm among members for the cuts was fairly strong initially but production has been climbing again in recent months alongside rising oil prices.

OPEC's own estimates, derived from secondary sources, show that the rate of compliance with the cuts fell to 64.5% in August from 67.3% in July, with OPEC-11 production rising 115,000 b/d to 26.334 million b/d from an upwardly revised 26.219 million b/d in July.

Total OPEC production averaged 28.83 million b/d in August, up 92,000 b/d from July's upwardly revised 28.738 million b/d, OPEC said.

A Platts survey the week ended September 11 estimated total OPEC output in August at 28.79 million b/d and OPEC-11 output at 26.24 million b/d. The International Energy Agency the week ended September 11 estimated total OPEC output at 28.9 million b/d and OPEC-11 output at 26.25 million b/d.

At talks in Vienna the week ended September 11, OPEC sidelined weak fundamentals in its decision to maintain current output limits, saying it was reluctant to take any action that might jeopardize a global economic recovery.

OPEC's latest production estimates, including Iraqi volumes, are below the group's forecasts of demand for its crude both this year and next, although the report makes slight upward revisions to the projections -- 70,000 b/d in 2009 and 90,000 b/d in 2010.

OPEC now sees the call on its own crude averaging 28.52 million b/d in 2009 and then dropping to 28.06 million b/d in 2010 -- lower than the 28.83 million b/d it said it pumped in August.

The call on OPEC crude is the difference between projected world oil demand and combined non-OPEC production and NGLs produced by OPEC but which are not covered by OPEC output pacts.

OPEC now expects world demand to average 84.56 million b/d in 2010, 150,000 b/d more than previously predicted. For 2009, it has raised its demand estimate by 140,000 b/d to 84.05 million b/d.

In addition to the healthier picture of the US economy, OPEC said oil demand was strong in most of the developing world, especially China, India and the Middle East.

On a year-on-year basis, world oil demand was 3.05 million b/d lower in the first quarter of 2009, and 2.26 million b/d lower in the second quarter. But in the third quarter, with signs of economic recovery, this year-on-year decline is expected to narrow to 890,000 b/d, and to just 100,000 b/d in the fourth quarter of the year, OPEC said.

On the supply side, OPEC made minor upwards adjustments to its estimates of non-OPEC oil production in both 2009 and 2010. It now expects non-OPEC supply to average 50.81 million b/d this year, 70,000 b/d more than reviously, and to rise to 51.22 million b/d in 2010, up 50,000 b/d from the previous monthly report's estimate.

OPEC NGL production is forecast to rise to 5.27 million b/d in 2010 from 4.73 million b/d in 2009.