The delicate balancing act that is the oil market
Looking at industry data, it is fair to say the oil market is rebalanced now as the US oil stocks were finally in line with their five-year average in the week ending March 16.
The US Energy Information Administration (EIA) released data on March 21 showing that there was a surprising fall in oil stocks that is contrary to historical seasonal trends. That happened on the back of more crude oil processing in the US and less oil imports into the country.
Based on the EIA numbers, it seems that the US market now is in balance. The oil and products stored in US storage facilities make up around 75 percent of stocks in the Organization for Economic Co-operation and Development (OECD).
OPEC and its allies, who are part of a global “production cut agreement” to balance the market, are using the OECD stocks for the past five years as a measure for the success of the deal.
Ministers of OPEC and non-OPEC countries have declared many times that the goal of the agreement is to bring oil stocks back to their five-year average.
Many had argued in past weeks that the market is already rebalanced, oil inventories are at their normal levels and the glut in inventories are cleared weeks ago.
For OPEC and its allies, the job is not yet done. Saudi Arabian energy minister Khalid Al-Falih said on March 22 in an interview with Bloomberg TV in Washington that two-thirds of the glut is cleared and one third remains.
The 24 producers in the production cuts agreement, including OPEC members have done a successful job in lowering the overhang in inventories. OPEC and non-OPEC joint technical committee (JTC) had met on March 19 and decided that, as of end of February, there was only 44 million barrels of oil left in OECD stocks above the five-year average. In the Bloomberg interview, the Saudi energy minister cast doubt on the success of the agreement, saying the “rate at which we were able to achieve the two-thirds reduction may not be sustainable at same pace.”
OPEC and its ministers seem to hold a different view of the issue and even a different calculation than the industry. Goldman Sachs, for example, said in a recent report that the market is already balanced. For OPEC it is close, but not that close, and the target is still moving because no one can tell for sure how much shale oil the US can produce this year.
Will the shale growth rate repeat in 2018? “I don’t know,” Al-Falih told Bloomberg. So when will the market rebalance?
The JTC in its meeting on March 19 saw the market rebalancing sometime between second and third quarter of this year. Russian energy minister Alexander Novak told reporters on March 21 that he expects market to rebalance in third quarter this year.
There is big debate at OPEC and at the JTC over the real measurements that can be used to assess the deal. The Saudi and Russian energy minister agreed that the five-year average is a flawed measure because there are years of abnormal stocks build up.
Therefore, the technical members of the JTC proposed the use of other measures to assess the normality of the stocks. I think it is too late for OPEC to change the technicalities of the deal, especially now everyone expects the market to rebalance soon.
OPEC and its allies must steer a steady course until the glut is cleared.
By continuing to cut production by around 1.8 million barrels a day, as agreed in the deal, OPEC and its allies risk seeing an overbalanced market, and the surplus in the stocks may turn into deficit or the balance in general of the oil market may turn into deficit.
The Saudi energy minister doesn’t seem to be worried about this issue and said early this year that it is better to see a little overbalanced market than relying on unreliable data and end the cuts early.
So now we are back where we were a few months ago, when everyone was talking about a surplus.
OPEC and its allies must steer a steady course until the glut is cleared. It doesn’t matter what measure they use — what matters is they don’t change anything in the deal.
Many countries are waiting for the day when OPEC declares the market is finally balanced so they can start exiting the deal gradually, or at least begin to consider that.
At this stage it is more important for OPEC to revise its numbers and think about cooperation beyond 2018 since 2019 might be another crazy year for the oil market.
- Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi
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