Reduced demand for gasoline and lower pump prices could undermine the Organization of Petroleum Producing Countries’ attempts to cut crude oil production and boost prices, according to research from the Chicago-based firm Morningstar.
Last week, OPEC agreed to continue its production cuts, but those cuts are offset by strong U.S. shale production and record inventory that threaten to keep oil prices lower.
Gulf Coast refining production is helping — during the week of May 19, refineries processed 9.4 million barrels a day, higher than the 10 year average, according to the U.S. Department of Energy. As long as crude demand remains high from refineries, the price of oil is expected to rise.
But there are two conditions that, if not met, could upset OPEC’s attempts to boost the oil market, according to Morningstar. First, domestic and international gasoline demand will need to rise and keep inventories down. And second, gas and diesel prices will have to go up. But if prices remain low, refineries will struggle to process more crude as oil prices rise.
“Our analysis shows that Gulf Coast diesel demand has driven refinery throughput, but gasoline inventories point to weaker margins ahead. Lower margins are likely to stall the refining revival and prolong the crude surplus despite OPEC’s efforts,” the Morningstar report said.