OPEC output cuts to continue despite bullish signs
OPEC+’s Joint Ministerial Monitoring Committee meeting in Baku earlier this week decided to continue cooperation between the Organization of the Petroleum Exporting Countries (OPEC) and non-members on the current 1.2-million-barrel-per-day (bpd) output cuts until OPEC’s June 25-26 meeting in Vienna. This illustrates continued collaboration between the 25 producers for the second half of the year, and perhaps into 2020.
It is premature to alter the strategy of output cuts amid current geopolitics, macroeconomics, American sanctions on Iran and Venezuela, and the latest developments in US shale production that sound promising but might be misleading in their direction and their reflection on the market.
It is absolutely wise that OPEC postponed its April meeting and decided to assess in June whether to keep production cuts in place. By then, the OPEC+ agreement would have been in place for two and a half years. OPEC has achieved its ultimate target of balancing the market by removing excess inventories.
Organization for Economic Co-operation and Development (OECD) stocks are hovering at parity, slightly above or below the five-year average. Despite rising oil supply from the US, which reached 12 million bpd in February, this has not led to a substantial build-up in global inventory levels for crude. Yet it is more difficult to stay on top than to get there, so OPEC+ efforts must continue beyond June 2019 as the market badly needs balance in the face of various challenges.
Strong activities emerged in light sweet crude trading due to naphtha and gasoline refining margins improving. They were at low levels a month ago as the market was saturated with additional supplies from refiners. Naphtha and gasoline have recently tracked bullishness in the Asian market, which has been seeing steady improvement amid tightened supply due to regional autumn refinery maintenance.
In the second quarter, Asian naphtha refining margins are expected to further increase amid high summer demand, since naphtha is also used for gasoline blending. Therefore, the market will be able to absorb rising US production.
Global refining margins will also be affected by the major fire at a furnace at ExxonMobil’s 563,000-bpd refinery in Baytown, Texas, which is the third-largest in the US. This will further strengthen global gasoline and naphtha markets amid expected tighter supplies.
- Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza