TORONTO: Kuwait and the leading oil producer in the Gulf, Saudi Arabia have given a clear signal that the Organisation of Petroleum Exporting Countries (Opec) plans to extend into the second half of the year a deal with non-Opec producers to curb oil supplies.
Saudi Energy Minister, Khalid al-Falih and Kuwait’s oil minister, Essam al-Marzouq, gave the likely signal at the ongoing energy conference in the United Arab Emirates (UAE) on Thursday.
“There is consensus building but it’s not done yet,” Mr al-Falih told reporters in UAE. When asked about non-Opec Russia, he replied: “We are talking to all countries. We have not reached an agreement for sure, but the consensus is building.”
Kuwait’s oil minister Mr al-Marzouq also seemed in agreement. “We have a noticeable increase in compliance from non-Opec, which shows the importance of extending the 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.”
Despite the attempts to balance the markets, bearish elements continue to haunt. A high inventory level remains a major concern. Oil cuts may need an extension to drain high global inventories, said Mr Falih.
While inventories held at sea, producer countries have dropped. They remain stubbornly high in Asia and the United States, reports confirm. The International Energy Agency (IEA) reported that inventories in industrialised countries were still 10 per cent above the five-year average.
Commodities analyst at Citigroup said Opec is faced with a surprising scenario: global stockpiles are even higher than when they started. 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. While the group has fully implemented it’s pledged cuts, that’s being offset by US shale oil producers buoyed by price gains.
At the end of December, commercial oil stockpiles in the 35-nation The Organisation for Economic Co-operation and Development totaled 2.98 billion barrels, IEA reported. That rose to 3.06bn barrels in January. That fell only slightly in February, staying 330 million barrels above the five-year average, bigger than the surplus of 286m at the end of December, IEA data indicated.
Oil strategist for Bloomberg, Julian Lee, admits that the volume of oil held in tankers 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 2.2m 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.
Opec prefers to maintain a less optimistic picture. It shows global oil inventories increasing by 430,000 barrels a day in the quarter.
Overall, the IEA reckons about 986m barrels of oil were added to global inventories in the last three years, while the Opec puts the figure at 1.2bn barrels. Opec therefore sees the world with supply still running ahead of demand, adding about 280,000 barrels a day more to inventories.
Energy correspondent at Bloomberg, 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 are combining 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.
“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. And in the meantime, the US shale production is set to rise to 5.19m barrels per day in May, adding another bearish element to the market.
The tug of war is on. The rebalancing of markets seems a tough nut to crack. Even Opec would have to concede.
Published in Dawn, April 23rd, 2017