The slow road to rebalancing the oil markets


The slow road to rebalancing the oil markets

The last seven days in the oil patch were eventful: Russia held its energy week and India held the local CERA week conference, while US crude stocks fell another 6 million barrels and the country exported an unprecedented 2 million barrels. 
Tropical storm Nate necessitated a total shut down of Gulf of Mexico refineries and 70 percent of offshore Gulf of Mexico production. Around 60 percent of US refining capacity is in the Gulf of Mexico. 
On Monday Saudi Arabia announced that November exports would only reach 7.2 million barrels per day, which is roughly 500,000 barrels below the demand for Saudi crude during that month.
What does this activity mean in terms of the long anticipated balancing of oil markets?
In November 2016 OPEC and 10 non-OPEC nations decided to take 1.8 million barrels out of production. That led to market hubris and the oil price spiked at nearly $60 in January. Since then the price came down to the forties and had a hard time recuperating. Brent now trades in the mid to high $50s.
US oil prices fell slightly on Wednesday to $50.79 per barrel.
Demand is strong: More than 1.5 million barrels a day for 2017 and 1.4 million-plus barrels per day for 2018, according to OPEC’s recently released Monthly Oil Market report. However, supply has gone up too. US shale producers came back with vengeance once the oil price broke the $40 threshold. 
They had increased productivity by 3 percent month on month during the lean oil price years and are able to compete now. Libya and Nigeria had been exempted from the deal due to internal political strife. They surprised by upping production by more than a combined 700,000 barrels per day. Initially US stocks were slow to draw down. The Hurricane season did not help either. 
Whenever the refining centers on the Gulf of Mexico are shut crude has nowhere to go, stocks increase and prices fall. Still, US oil stocks have come down by more than 70 million barrels since April. This is important, because traders and hedge funds pay disproportionate importance to this metric.

Despite all the angst about rebalancing, the big three agencies all agree that it is underway. But conventional oil is an ultra long-cycle business, so balancing the market on the way up will be as challenging as on the way down.

Cornelia Meyer

The OPEC and non-OPEC deal was renewed in May 2017 for another nine months. It has since become obvious that a further extension is needed. Saudi Energy Minister Khalid Al-Falih takes it as a given that the deal will remain in force at least through the second quarter of 2018. Last week Russian President Vladimir Putin went further and floated the possibility of extending the deal through 2018. 
The Saudi move to cut exports shows that OPEC’s kingpin will do what it takes to bring markets into equilibrium. The Kingdom is doing so at its own expense. Russia, Iraq and to a lesser extent Iran are only too happy to substitute for Saudi crude — especially in the key Asian markets.
Despite all the angst around the speed of rebalancing, the big three energy agencies OPEC (for the producers), IEA (for the OECD) and the US EIA (Energy Information Agency) all agree that rebalancing is well underway in the oil markets. OPEC Secretary-General Mohammed Barkindo also said that he saw clear signs of a market rebalancing. It is not a matter of “if” — it is a matter of when markets will reach equilibrium. Seasoned observers have always pointed out that this would take time. 
In the long run there is an alternate scenario to consider: Due to the low oil price, big oil has canceled scheduled investments to the tune of more than 40 percent over the last few years. Assuming the forecasted demand growth, we might experience production shortfalls in the medium term. Conventional oil is an ultra long-cycle business. 
Once demand outstrips supply, there is no easy way to turn on the tap. Balancing this commodity on the way up will be as challenging as it was on the way down. 
• Cornelia Meyer is a business consultant, macroeconomist and energy expert. She can be reached on Twitter @MeyerResources.
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