IEA Follows OPEC Downward on Oil Demand (CVX, VLO)

One day after OPEC released its monthly oil market report, the International Energy Agency published its monthly report. The two agree on most things, but differ on details. Most important, both see a decline in forecast global GDP growth in 2011 and a significant chance that the 2012 GDP forecasts are too optimistic.

According to the IEA, global demand for crude will decline by 50,000 barrels/day and finish the year at 89.2 million barrels/day. OPEC’s predicted demand for crude in 2011 is 87.8 million barrels/day, primarily because OPEC’s global economic forecast is weaker than the IEA’s.

Because the IEA represents the 30 developed nations of the OECD, including the US and all of Europe, its forecasts are based on the somewhat rosier economic outlooks that each nation predicts both for itself and for the world. After all, OECD politicians do want to look good and get re-elected. Predicting an economic slide is not likely to help with either of those goals.

OPEC has its own ax to grind as well. The cartel’s first duty is to make sure that it does not get blamed either for higher prices or falling production. It’s either the economy or the speculators or anything else. The cartel and its individual members always do the best thing for the market.

The IEA notes that OPEC production in September slightly to 30.15 million barrels/day. OPEC said it produced 29.9 million barrels/day in September. IEA said that Libyan output rose to 350,000 barrels/day in September and the group expects production to reach 600,000 barrels/day by the end of the year. That’s about half Libya’s usual production. OPEC put Libyan production in September at less than a third of the IEA figure — 96,000 barrels/day.

OPEC estimated that demand for its own crude in 2012 would reach 29.9 million barrels/day. The IEA figures that demand for OPEC crude in 2012 will be 30.5 million barrels/day.

The IEA has also noted a drop in OECD commercial stocks to about 2.7 billion barrels in August and forecast a drop of another 12.7 million barrels in September. The report also notes a drop in floating storage, likely due to the falling prices for crude during September.

Both IEA and OPEC want Libyan production back online as quickly as possible. Light Libyan crude will do a lot to close the $25/barrel differential between WTI and Brent crude prices, and help keep the cost of a barrel oil at or slightly under $100. That’s a profitable price point for producers, and consumers haven’t balked at paying $4/gallon for gasoline.

And what about Big Oil? Chevron Corp. (NYSE: CVX) has released its preliminary outlook for the third quarter, saying that lower crude prices produced lower income, but that refining profits will offset the decline. Solid refining profits are mostly due to the WTI-Brent differential, the discount for heavy sour crudes, and in Chevron’s case the sale of its UK refinery to Valero Energy Corp. (NYSE: VLO) for about $2 billion.

The conclusion one could reach from the IEA and OPEC reports is that pump prices in the US could fall further. As the global economy continues to get weaker and the Libyan crude comes back into production, US pump prices which have fallen by about $0.20 in the past month, could well continue that slide. A price near $3.10/gallon by year’s end is not out of the question.

Paul Ausick