Oil Check: OPEC+ Production Cuts and Declining Demand

What Happened to OPEC+ Production Cuts Raising Gas Prices?

Checking back in on oil, you may have noticed a few things. The price of gasoline has been climbing, but not quite as fast as we projected in our previous oil check. So what’s happened? And what hasn’t? Did sabotage, tensions and ship seizures in the Strait of Hormuz play into it? Or the upcoming change to International Maritime Organization (IMO) emission standards? Let’s take a look at the last few months and everything that’s contributed to the position we currently find ourselves in.

OPEC appeared to do everything right…

Sanctions against Iran removed Iranian oil production from the global market. Additionally, Venezuela did little to contribute to the global supply in the first quarter of 2019. But OPEC+ still extended production cuts for another nine months. For the first half of 2019, those cuts had a compliance rate of 111%. That’s about as close as you can get to an A+ in the real world. But crude oil remains in the price range of $70-$80 dollars per barrel.

…so why do oil prices remain so low?

One factor is the continued production—growth even—of US oil. It would be truly aweing if OPEC+ took such efforts to increase barrel prices and the output from America essentially canceled them out. But that simply isn’t the case. In other years, oil prices would have rocketed up with any of the supply disruptions we are seeing. Why isn’t this happening? Canaries of the global economy have stopped singing songs of peak oil demand. Several signs point to an approaching economic slowdown. Manufacturer inventories that were growing at the end of 2018 continue to do so, an indication that industry sectors like construction and machinery are slowing down.

Additionally, manufacturers and construction companies in the U.S. report soft growth for the first half of 2019. But the U.S. isn’t the only country exhibiting signs of slow down. German manufacturing, a gold standard in the European economy, has also seen slower orders and exports. The consequence of this slackening demand is a decreased need for oil. With fewer orders and less exports, transportation—cargo planes, semis, freighters—decreases, and with that their need for fuel. Further evidence of this chain reaction? Global freight volumes are following a similar downward trend. While some of this can be attributed to tariff pressure, a fall in the demand remains a fall in demand. OPEC held to their production cuts. But their projections for how much needed to be cut simply wasn’t enough.

In the near future? Things are about to get Barry-er

As summer sets one foot out the door, tropical storm season begins nudging its way in, beginning with Tropical Storm Barry. Tropical storms and hurricanes in the Gulf of Mexico can create price surges because they can disrupt both refinery operations and offshore oil production. Tropical Storm Barry may not have wreaked its anticipated havoc, but it is only the first tropical storm of the season. Beyond destruction tolls, production has to wait for floodwaters to recede and shipping lanes to reopen before operations can resume. You can’t work the refinery job or what have you if flood waters remain between you and the entrance.

One effect of this delay is a more immediate impact on prices, one that can last a couple weeks and spike wildly in a wide region: as far as the southwest to the east coast. Barring damages, production can resume fairly quickly. Still, average U.S. prices will keep edging upwards over the next week or two as fuel production gets back online.

But the Philadelphia Energy Solutions refinery remaining offline means further regional impacts. While there has been talk about restarting the Point Breeze crude unit on the site, most analysis suggests the refinery won’t be contributing any gasoline or diesel in the Northeast in the second half of 2019. As hurricane season approaches, risks of impact increases and our refining system has already had to absorb the shutdown of the 10th largest complex.

What comes next?

There’s a lot of interesting pieces to look out for in the months to come. Will OPEC further increase production cuts? Will the U.S. continue their production rate? Will the manufacturing and construction sectors in the U.S. and abroad continue their slide or will they pull back up? Will the upcoming hurricane season have a major impact on U.S. production? When it happens, you can hear about it here.

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The Author

Ben Reiland

Ben Reiland is a Content and SEO Specialist with Motus, LLC. Host of The Road Warrior Podcast, he shares the stories of people who drive for work when he isn't keeping an eye out for industry impacts and staying on top of trends. Ben's expertise ranges from verticals and labor laws to oil price impacts and more!

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