If petroleum prices in Australia or worldwide are going to be checked it is going to come from refinery overproduction running head on with slackening global oil demand. It is not going to come, at least at the moment, from rising crude oil inventories even with the U.S. cranking out record amounts of crude.

This became evident this week in two reports, one from the International Energy Agency (IEA) and the other from Saudi Arabia, one of the world’s biggest producers of oil along with the U.S. and Russia.

The IEA lifted its global oil demand growth forecast to 1.5 million b/d, up 100,000 b/d, which means that worldwide usage of oil this year will top 99- million b/d. Even with the larger demand growth forecast, IEA’s prediction trails other consensus outlooks that put demand growth in 2018 as high as 1.7 million b/d.

IEA also noted that global oil stocks in the OECD developed countries did increase in the current month but by half of the normal increment of growth. Moreover, the global oil surplus has been whittled to just 53 million barrels and global stocks at just over 2.8 billion barrels are well below the 3 plus billion barrel levels that crashed oil prices.

Meanwhile, Saudi Arabia this week reaffirmed its commitment to keep a lid on oil production, a move that is clearly supportive of prices.

In a rare press release, the Saudi’s promised that its crude oil output would remain below 10 million b/d with less than 7 million b/d of crude leaving the country for export. The Kingdom has at least 2 million b/d of additional production in its pocket but remains committed to reducing the global oversupply which depressed oil prices beginning in 2014.

“Saudi Arabia continues to lead by example by producing below the production targets it agreed to,” noted the energy ministry in a news release.

Meanwhile, OPEC’s monthly summary of world markets suggested that global oil stocks are still around 50 million bbl above the five-year average stock total that is targeted by the cartel. Inventories, according to OPEC analysts, however, are some 206 million bbl below where they were one year ago – numbers that are confirmed in the IEA report.

The OPEC report detailed that total cartel output dropped 77,000 b/d in February to 32.19 million b/d, thanks to lower production in the United Arab Emirates, Venezuela and Iraq.

However, global production climbed by 370,000 b/d to 98.2 million b/d, the cartel said, thanks mostly to the contribution of shale. They expect U.S. shale production to average 5.72 million b/d in 2018, and that reflects an upward revision of 130,000 b/d from their forecast of just one month ago.

Finally, the IEA report does predict that global refining throughput of crude will ramp up to a record high 81.8 million b/d in the second quarter, a development that could threaten to push oil prices lower if demand fails to keep pace with the extra output. IEA doesn’t think this will happen!

IEA’s prediction would put global refining output above the previous high of 81.7 million b/d in Q4 last year and 1.7 million b/d higher year-over-year.  Second-quarter throughput has historically declined from the previous three-month period, but estimates for this year, as well as data for 2015 and 2017, show the reverse.

A record 81.8 million b/d refinery intake would cause crude stockpiles to fall by 500,000 b/d, assuming production by members of OPEC and other key oil- producing nations stays flat from February 2018 onward, said the Paris-based IEA. Still, refineries would not be able to meet the expected level of refined product demand and so some 600,000 b/d would need to come from inventories. When refiners ran at an historical record throughput level in Q2 last year, refined oil product stocks still fell by 1.5 million b/d.

“Seasonally higher refined product demand in Q2-Q3 2018 will accelerate the rebalancing of the market, regardless of the market’s preference in drawing crude oil or products stocks first,” said IEA in today’s report.

“Oil markets will enter Q2 2018 with only a 75 million bbl surplus of nominal refined products, down from 320 million bbl in Q1 2016. … The crude oil surplus relative to 2013, excluding Chinese implied balances, is expected to reach 125 million bbl by Q2 2018, after a build in Q1 2018.”

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