JPMorgan Pours Cold Water On The Crude "Demand Destruction" Story: Sees Crude Spiking Over $130 By June

Tyler Durden's picture

As if the implied US downgrade was not bad enough for ostritches whose heads are infatuated with sand, here comes JPM's Lawrence Eagles destroying the myth about crude demand destruction, so aggresively spun by a flaiiling Saudi Arabia which can not afford to admit that the only reason it can not hike production is because it is already at capacity. From JPM: "Our refinery activity projections show that crude throughput (demand
for crude) will rise by at least 2.7 mbd between now and August, and
will need to be much higher to avoid a steep second half 2011 product
stock draw. Minister al-Naimi’s comments imply OPEC March production
at below 28.4 mbd, and thus a steep increase in supply will be needed
over the coming months to meet our estimated 29.7 mbd call on OPEC in
3Q11.
The reality is that following a supply shock, the oil market can
sometimes need wider than normal differentials to trigger the economic
adjustments. If supplies are not increased decisively for June liftings be prepared for price spikes over $130/bbl." Translation: $5 gas average prices are now virtually an inevitability.

From JPM

Saudi Oil Minister Ali al-Naimi recently offered an unusually candid look at Saudi oil production, saying that while February hit 9.1 mbd, March was down to 8.3 mbd and production will only be a little higher in April. He cites the decline as evidence that the market is oversupplied. He has just cause.

Undoubtedly demand for OPEC crude “feels” weak at the moment due to domestic refinery turnarounds and Japanese outages. Our refinery maintenance estimates show 6.5 mbd off line in April compared to peak throughput in December. But there is a real danger that by responding to regional market conditions for specific crudes, OPEC is setting the stage for further global price spikes. Excluding markets around landlocked Cushing, crude inventories are very tight (see figure to right). And with refineries coming back from maintenance amidst surging summer demand, stocks will quickly draw further. Our refinery activity projections show that crude throughput (demand for crude) will rise by at least 2.7 mbd between now and August, and will need to be much higher to avoid a steep second half 2011 product stock draw. Minister al-Naimi’s comments imply OPEC March production at below 28.4 mbd, and thus a steep increase in supply will be needed over the coming months to meet our estimated 29.7 mbd call on OPEC in 3Q11. Many of OPEC’s “typical” buyers are out, so they likely have to offer an even wider discount to induce alternative refiners to take an unusual crude slate. That will go against the grain - OPEC felt it was ‘pushing on a string’ in 2005, the last time Brent/Dubai got this wide, because it felt ‘it was taking money off the table.’ The reality is that following a supply shock, the oil market can sometimes need wider than normal differentials to trigger the economic adjustments. If supplies are not increased decisively for June liftings be prepared for price spikes over $130/bbl.