Cuts Ahoy

OPEC's Cuts Are Treading Water

A long way to go for inventories to really shrink.

The first place that OPEC's output cuts ought to show up is in the volume of oil moving across the world's oceans from producing countries to consumers. That is happening, but more slowly than we might reasonably expect. It looks like it will be a while before global inventories are back to levels that OPEC's comfortable with.

Most of the group's crude is exported by sea. This means any reduction in supply should quickly show up in a smaller volume of crude in ships leaving member nations.

The agreed cut of about 1.2 million barrels a day, if translated barrel-for-barrel into exports, means we ought to see the volume of oil in transit fall the same amount. So, in the first 70 days of this year, we ought to have seen it fall by about 84 million barrels -- all other things being equal.

Sea Change

Output cuts trigger a slow fall in the volume of oil at sea in tankers

Source: Bloomberg, Oil Movements

Note: Four-week moving averages

Data from U.K. research firm Oil Movements certainly shows the volume of oil in transit falling since the start of the year -- a clear indication that cuts are happening. The amount is much less than OPEC would like. The volume of oil in tankers fell around 9 million barrels from Dec. 31 to March 11, which equates to 123,000 barrels a day. The forecast is for volumes to drop another 7 million barrels by April 1. But it's still not enough to keep OPEC happy.

One problem is that rising U.S. production has partly offset the reduction in flows from the OPEC countries in the Middle East. Even though most of this pickup won't show up in the transit figures, as American oil output tends to be consumed domestically, the country's crude exports have nevertheless risen dramatically.  This will boost the volume of oil at sea, particularly as more U.S. crude is moving over longer distances. 

Soaring Shipments

U.S. crude exports jumped as output recovery met seasonal refining slump

Source: Department of Energy

There may also be a seasonal element in play here. The U.S. refining sector typically performs heavy maintenance as winter draws to an end, with crude oil intake this year down by 850,000 barrels a day between January and February. This, too, could be helping to limit the impact of the OPEC cuts on the volume of oil in transit and on the volume of oil in storage tanks, too.

Slowing The Flow

Exports to the U.S. Gulf coast from Saudi Arabia, Kuwait and Iraq continue to fall

Source: Bloomberg tanker tracking

Combined shipments from Saudi Arabia, Iraq and Kuwait to the U.S. Gulf coast have fallen steadily, dropping to 1.1 million barrels a day in February from 1.3 million barrels a day in January. Bloomberg tanker tracking shows the average sailing time from the Persian Gulf to the Gulf of Mexico is around 45 days, so the first crude loaded in February is just starting to arrive now. We've been feeling the effect of lower January exports, and this impact should strengthen in the weeks ahead.

This is set to dovetail with rising refinery demand as plants come back into operation after seasonal maintenance, and should start to pull crude out of storage in the U.S. But there is still a long way to go until near-record inventories are back at more normal levels and getting them there will require longer, or deeper, cuts from OPEC and friends. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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