US "Mini OPEC" Warning? Amid global oversupply concerns, American refining giants cut production capacity

After a series of major mergers and acquisitions in the oil exploration and production sector, the United States may have given birth to a domestic "mini-OPEC" cartel as dubbed by the media. Due to declining demand and concerns about global oversupply of crude oil, these refining giants in the United States are coordinating policies to reduce production capacity this quarter, signaling an oversupply warning.

Media reports indicate that four leading refining companies in the United States are planning to cut production capacity. Among them, Marathon Petroleum, the largest refining company in the United States, plans to reduce the average refining capacity of its 13 factories to 90% in the third quarter, the lowest level for the same period since 2020, a decrease of 4 percentage points compared to the same period in 2023. PBF Energy announced plans to reduce refined crude oil production to the lowest level in three years. Phillips 66's refineries will operate at the lowest level in two years, and Valero Energy is expected to soon reduce oil processing volume.

Approximately 40% of the gasoline and diesel production capacity in the United States comes from the four major refining companies mentioned above. Their refineries process oil into diesel, aviation fuel, gasoline, and other essential crude oil products for the economy. The market is concerned that economic slowdowns in major economies like the United States will reduce crude oil demand, leading to a decline in profits for refining companies.

The media points out that the fuel manufacturing industry in the United States is a key factor in the global oil market supply-demand balance. With stagnant consumption and declining profit margins, the industry is struggling, and the economic slowdown makes it more likely for crude oil to be oversupplied. Even if OPEC+ continues to cut production this year and geopolitical tensions escalate, the threat of an economic slowdown has limited this year's oil price increase to around 7%.

Bachar EL-Halabi, a senior news reporter at Argus Media, posted on social media on Monday that OPEC has taken a step back, lowering its global oil demand growth expectations for 2024 and 2025 for the first time since July last year. OPEC now expects demand growth for this year, 2024, to be 2.11 million barrels per day, down from 2.25 million barrels per day previously, and has lowered next year's oil demand growth expectation by 60,000 barrels per day to 1.78 million barrels per day.

Following the adjustment, the gap between OPEC's oil demand growth expectations and those of the International Energy Agency (IEA) and the Energy Information Administration (EIA) under the U.S. Department of Energy has narrowed. However, EL-Halabi believes that compared to the forecasts of the IEA and EIA, OPEC's data remains relatively optimistic. The IEA expects oil demand to grow by 970,000 barrels per day this year, while the EIA forecasts an increase of 1.1 million barrels per day.

Vikas Dwivedi, global oil and gas strategist at Macquarie, recently commented that the decline in refining margins has laid the groundwork for another large-scale refinery maintenance cycle in the United States in the autumn, which will put pressure on the market's supply-demand balance and may lead to an increase in U.S. crude oil inventories for the remainder of the year. The likelihood of oversupply has reduced the escalating geopolitical risk premium in the Middle East, as "the market is no longer willing to pay a huge premium for this, as geopolitical tensions have not yet resulted in oil (supply) losses." Dwivedi expects that the average price of Brent crude oil in the fourth quarter will be around $75 per barrel, and it will drop to $64 per barrel in the second quarter of next year.

On Monday this week, international crude oil futures rose for five consecutive trading days. During the midday trading session of the US stock market, US WTI crude oil rose by more than 4%, breaking through the $80 mark for the first time since late July, with Brent crude rising to $82.4, hitting a new intraday high since late July and rising by over 3% intraday.

Commentators believe that in addition to OPEC lowering its oil demand growth expectations for this and next year, the sharp rise in oil prices on Monday was also due to market expectations that the continuous escalation of conflicts in the Middle East may tighten global crude oil supply.

According to China News Network, the US Department of Defense announced last Sunday that Defense Secretary Austin ordered the deployment of a cruise missile nuclear submarine to the Middle East. There are also reports that Israel has put its military on high alert after observing preparations by Iran and the military organization Hezbollah for possible attacks.

Claudio Galimberti, Global Market Analysis Director at Rystad Energy, commented that this week and next week are crucial for determining whether the geopolitical situation will escalate further and whether geopolitical risks will have a significant impact on oil prices. Escalating tensions could pose a major threat to global oil supply. Traders are most concerned about the risk of attacks on oil infrastructure, as such disruptions could significantly reduce crude oil supply and drive up oil prices