Don't Believe The Hype: Oil Markets Far From Recovery

Authored by Arthur Berman via OilPrice.com,


Global oil inventories are falling because of OPEC and non-OPEC production cuts, but the road to market balance will be long.


Production cuts have removed approximately 1.8 million barrels per day (mmb/d) of liquids from the world market since November 2016 (Figure 1).



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Figure 1. OPEC-NOPEC Have Cut 1.8 mmb/d Liquids Since November 2016. Source: EIA April 2017 STEO, EIA International Data and Labyrinth Consulting Services, Inc.


Saudi Arabia has cut 619 kb/d (35 percent of total) and the Gulf States Cooperation Council—including Saudi Arabia—has cut 1,159 kb/d (65 percent of the total). Other significant contributors outside the GCC include Iraq (12 percent), Russia (12 percent) and Mexico (9 percent) (Table 1). Nigeria’s cuts are probably involuntary since it was exempted from the OPEC agreement. Iran and Libya–also exempted–and both increased production.



Table 1. Summary table of OPEC-Non OPEC production cuts, November 2016 through March 2017. Source: EIA April 2017 STEO, EIA International Data and Labyrinth Consulting Services, Inc.


Inventories and The Forward Curve


OECD inventories began falling in July 2016, four months before the OPEC production cuts were finalized. Stock levels have declined approximately 107 mmb according to recently revised EIA STEO data (Figure 2). That includes the January 2017 increase recently noted in the April IEA Oil Market Report.



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Figure 2. OECD inventories have fallen more than 100 million barrels since July 2016. Source: EIA April 2017 STEO and Labyrinth Consulting Services, Inc.


Although this represents progress toward market balance, stocks must fall at least another 260 mmb to reach the 5-year average level to support oil prices in the $70 per barrel range.


Almost three-quarters (73 percent) of OECD decline was from non-U.S. inventories. Perhaps the intent of OPEC’s November cuts was to stimulate a decrease in U.S. inventories (about 45 percent of the OECD total). U.S. stocks and comparative inventories were increasing at the time of the cuts and did not start to fall until February 2017 (Figure 3). Since mid-February, U.S. stocks and comparative inventory have each declined 20 percent.



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