LONDON: An OPEC-led production cut may well be accelerating a drawdown in global oil stocks that began last year, but implementing the reduction for just six months means the producer group will fall short of achieving its objective of rebalancing the market.
The Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers in December reached their first deal since 2001 to curtail oil output jointly, by around 1.8 million barrels per day (bpd).
In the months leading up to the deal and after it was struck, OPEC ministers said tackling an overhang in crude and oil product inventories that has depressed oil prices for over two years was one of their main objectives. The International Energy Agency (IEA) said inventories of crude, natural gas liquids and oil products in member countries of the Organization for Economic Cooperation and Development (OECD) remained 286 million barrels above the five-year average of around 2.7 billion barrels. This is despite a draw of 800,000 bpd in the fourth quarter of 2016.
The overhang is almost evenly split between crude and liquids on one side and oil products on the other.
The agency forecasts a stockdraw of 600,000 bpd in the first half of 2017 if compliance with the output deal is maintained at January levels.
“If OECD stocks were to continue to draw in 2017 at the same pace as that seen over July-December, then it would take us around a year to return to the five-year average in stocks,” IEA oil analyst Olivier Lejeune said.
The problem for OPEC is that while high compliance with the agreed production cuts will help to bring down stocks, demand underperformance and rising non-OPEC supplies could temper the effectiveness of the move.
“What it (OPEC and non-OPEC cut) does is basically avoid an even worse surplus than what has been the case in 2015 and the first half of 2016,” said David Wech, managing director of consultancy JBC Energy.
“But it does not eliminate (the surplus) in the first half of the year,” he added.
Oil supply is expected to grow year-on-year in the first half of 2017 in large non-OPEC producers such as Canada, Brazil and Kazakhstan, BNP Paribas said in a research note this week.
“The key question is the extent of the renaissance of the US shale oil sector, given a continual rise in the rig activity since May 2016 and high hedge ratios for 2017 among producers,” the French bank said.
A threat to the deal’s success could also come from within OPEC as Libya and Nigeria, which are exempt from the cuts, raise output. Libya has added 190,000 bpd of production since October.
Regional imbalance
While OECD stocks are declining, inventories in non-OECD countries have been crawling up — especially in China and India, where reliable data on stock levels is harder to find.
Stock balances for China, the IEA has said, show an implied build of about 600,000 bpd for August to November. The rebalancing, therefore, could be uneven: Shifting an overhang from one region to another. OPEC and Russia have so far shielded Asia from export reductions stemming from lower output, mainly focusing on the US and Europe.
That could lead to continued builds in Asia as key producers fight for market share there.
“Our view has always been that there was a good chance of an extension largely because we always recognized that the focus was on bringing down that overhang and that that process is very likely to take more than six months,” Energy Aspects analyst Richard Mallinson said.
Energy Aspects estimates the global commercial overhang (excluding strategic petroleum reserves) was just under 400 million barrels at the end of last year.
This includes about 300 million barrels from the OECD and 100 million barrels from non-OECD.
The energy consultancy forecasts a stockdraw of around 700,000 bpd on average over the first half of this year. “It could be higher if the current higher demand trend persists,” Mallinson said.
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