Rebalancing of oil markets seen

By Syed Rashid Husain

CHATTER is growing, OPEC and its non-OPEC partners are ready to extend the output cuts beyond June.

Last Thursday, Saudi Arabia, and Kuwait gave the clearest signal yet, that OPEC plans to extend into the second half of the yea a deal with non-OPEC producers to curb oil supplies.

“There is consensus building, but it’s not done yet,” Saudi Energy Minister Khalid Al-Falih told reporters in the United Arab Emirates. When asked about non-OPEC producer Russia, Falih replied: “We are talking to all countries. We have not reached an agreement for sure, but the consensus is building.”

Kuwait’s Oil Minister Essam Al-Marzouq also seemed in agreement. “We have a noticeable increase in compliance from non-OPEC, which shows the importance of extending the agreement,” Marzouq said. He further added without identifying that one African country has expressed interest in joining the output cut agreement.

Omani Oil and Gas Minister Mohammad Bin Hamad Al-Rumhy admitted: “The number of countries that are supporting the extension I think would be quite high, percentage-wise.”

Compliance with the November agreement by major stakeholders also continues to grow. As per the official data submitted to JODI, the statistical arm of International Energy Forum (IEF), Saudi Arabia trimmed its crude exports to a 21-month low in February, falling to 6.95 million bpd from 7.7 million bpd in January.

Yet, despite the attempts to balance the markets, bearish elements continue to impact. High inventory levels remain a major concern. Oil cuts may need an extension to drain high global inventories, Falih agrees. “Our target is the level of inventories. This is the main indicator for the success of the initiative,” he emphasized.

While inventories held at sea and in producer countries have dropped, they remain stubbornly high in Asia and the United States, reports confirmed. The International Energy Agency is reporting that inventories in industrialized countries were still 10 percent above the five-year average.

Grant Smith writes that the OPEC is faced with a surprising scenario: global stockpiles are even higher than when they started. Inventories have started to decline, but by the time ministers gather in Vienna on May 25, developed nations still won’t have burned through the big stockpile increase caused by a surge in OPEC output just before the cuts came into force, data from the International Energy Agency indicate.

OPEC is “hoisted by its own petard” by agreeing in principle to reduce production last September while allowing members to keep boosting sales until the deal took effect on Jan. 1, Citigroup Inc. said. While the group has fully implemented its pledged cuts, that’s being offset by US shale oil producers buoyed by price gains, underlined Commerzbank AG.

At the end of December, commercial oil stockpiles in the 35-nation OECD totaled 2.98 billion barrels, the Paris-based IEA reported. That rose to 3.06 billion barrels in January. “Producers unintentionally accelerated activities that would ultimately obstruct, and for a period reverse, the very rebalancing they were trying to accelerate,” Ed Morse, head of commodities research at Citigroup was quoted as saying.

Inventories in the OECD fell only slightly in February and remained 330 million barrels above the five-year average, bigger than the surplus of 286 million at the end of December, IEA data indicated.

In the meantime, Julian Lee of Bloomberg admits that the volume of oil held in tankers – the most expensive storage option – has dropped. So, too, has the amount stored in commercial facilities in places such as the Caribbean and South Africa’s Saldhana Bay. US crude inventories also fell in the week to April 7 by nearly 2.2 million barrels. But while refined product inventories in the US are falling sharply, it’s really only the middle distillates (which include jet fuel, heating kerosene, and gas and diesel oils) that are bucking typical seasonal trends.

The IEA shows global inventories falling at a rate of 200,000 barrels a day during the first quarter of this year. But its analysis of observed stockpiles – and there are plenty of places, such as India, where volumes in storage are not easily counted – suggests “global stocks might have marginally increased” over the period, Lee pointed out. OPEC is thus preferring to maintain a much less optimistic picture. It shows global oil inventories increased by 430,000 barrels a day in the quarter.

Overall, the IEA reckons about 986 million barrels of oil were added to global inventories in the last three years, while the OPEC puts the figure at 1.2 billion barrels. OPEC thus sees the world with supply still running ahead of demand, adding about 280,000 barrels a day more to inventories, Lee highlights.

Javier Blas too seems to be agreeing. The Brent physical oil market is flashing signs of weakness again as dwindling Asian purchases, an influx of American crude to Europe, and supplies flowing out of storage all combine to recreate a glut in the North Sea.

The weakness is particularly visible in so-called time-spreads, he argues. Reflecting a growing surplus that could force traders to seek tankers as temporary floating storage facilities, the Brent June-July spread this week fell to an unusually weak minus 55 cents per barrel, down from parity just two months earlier. The negative structure is known in the industry as contango.

«It will not take much before we see headlines about floating storage starting to increase again,» Olivier Jakob of PetroMatrix GmbH, in Zug, Switzerland, was quoted as saying.

After a strong showing in the early parts of the year, the reduced demand from Chinese independent refiners – the «teapots» are also impacting the markets. Meanwhile, crude arrivals from the US are surging. American exports ran in early April at a four-week average of 706,000 barrels a day, up nearly 90 percent from the same time of last year, the US Energy Information Administration data says. In January and February, US exports to Europe climbed almost fivefold to 178,000 bpd, the most recent US Census Bureau figures compiled by Bloomberg show.

And in the meantime, the US shale production in May is set to rise to 5.19 million bpd, as the output from the Permian play, the country›s largest shale region, is expected to reach a record 2.36 million bpd.

The US EIA «estimates for a combined 124,000 bpd growth in US shale production has added another bearish element to the market,» the Vienna-based JBC Energy pointed out.

The tug of war is on. OPEC has a task in hand. None can deny. Yet, with a coordinated extension in output cuts, the much-wanted rebalancing of the markets in the second half of the year, could be on cards, one can argue now.