Tight global oil balance puts focus on supply
OPEC+’s April 2020 quota deal was fashioned to explicitly prevent a cataclysmic inventory build and then to significantly draw down stocks toward the 2010-2014 average. With so many suggesting 2022 will see the oil balance tilt into over-supply (code for inventories bloating), last week’s OPEC+ decision appears to belie the group’s goal. Except it did not.
While the further unwinding of quotas was treated as little more than a fait accompli, the story had layers that went largely undiscussed by most market watchers. One of these layers was the background analysis the producer group employed about the global oil balance.
The conclusion was the market could absorb incremental supply without causing inventories to swell. That view happens to jibe with our oil balance forecast, which we note is out of consensus.
There should be no debate that inventory levels are paramount in OPEC’s thinking. If one assesses the past year, the draw on total petroleum stocks in the OECD (the proxy for global stores) was the highest in history. Importantly, we estimate OECD petroleum inventories finished last year down near that 2010-2014 metric which is OPEC’s de facto target.
The above noted, global oil demand has a distinct seasonal pattern. Following the fourth quarter, which is when consumption normally peaks during the year, demand usually drops by between 1-2 million barrels per day in the first quarter.
For 2022, we debated internally whether a seasonal drop would take place as the world continued to recover from the effects of the pandemic. All in, our oil balance model suggests we are facing a supply deficit, assuming OPEC+ keeps unwinding quotas
as already agreed.
As a last comment, and while not much of a factor for the oil market yet, a state of emergency was declared in Kazakhstan in the past week after the outbreak of what was described as “the most violent protests in decades.” There has been something of a news blackout, but Kassym-Jomart Tokayev, the country’s president, did solicit military assistance from Russia to help end the unrest.
Most accounts suggest the cause of the social upheaval is linked to energy and food inflation. One key consequence of the unrest is potential disruption of the country’s near-2 million barrels per day of oil production, roughly 80 percent of which is exported.
While there have been indications that production has been affected, the current tightness of the oil balance does not allow for unplanned supply outages, particularly larger-scale losses. If inventories were swollen, a production outage might not present itself as a major issue, but like a skinny latte, the lack of fat means more upside risk to oil prices than what we already forecast.
• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986.