Taking Stock

OPEC Sees a World That Still Has Too Much Oil

Producer group at odds with the IEA over surplus stocks.
Updated on

The oil market is tipping slowly from glut to equilibrium, as output cuts from OPEC and 11 non-OPEC countries start to reduce crude flows.

It's not quite there yet. Indeed, the grand "re-balancing" of supply and demand has yet to take place, although the International Energy Agency does at least believe "that the market is already very close to balance," according to its latest monthly report.

Cutting Oil Supply

Output cuts are becoming more effective as non-OPEC participation improves

Source: Bloomberg

Note: Nigeria's production fell below its October baseline in March, boosting OPEC's output cut

What's more worrying, and where the IEA's number-crunchers differ sharply with their OPEC counterparts, is what happens next? Re-balancing is one thing, but the OPEC output cut was also meant to usher in a period when demand would start running ahead of supply, and when inventories would be reduced.

It's here where there's a hell of a discordance between the two groups, and even within the IEA's own figures.

True, 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. U.S. crude inventories fell in the week to April 7 by nearly 2.2 million barrels. But before we get too excited, that was the first big drop this year. While refined product inventories in the U.S. 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 where volumes in storage are not easily counted -- suggests "global stocks might have marginally increased" over the period. Confused? You're not alone.

OPEC, which published its own monthly report a day before the IEA, paints a much less optimistic picture. It shows global oil inventories increasing by 430,000 barrels a day in the quarter just ended. No confusion there. The world is still over-supplied with oil, according to its biggest producer nations.

And the surplus is big. The IEA reckons about 986 million barrels of oil were added to global inventories in the last three years. OPEC puts the figure at 1.2 billion barrels. Some of that is needed to fill new pipelines and to provide operating inventory for new refineries, but most is merely the result of over-supply.

Swelling Stockpile

Over-supply has boosted global oil inventories by around 1 billion barrels in 3 years

Source: IEA, OPEC, Bloomberg

The outlook for the current quarter is no clearer. The IEA sees further progress, with demand for OPEC oil running about 1 million barrels a day ahead of production, implying a similar-sized stock draw. But OPEC sees a world with supply still running ahead of demand, which will add about 280,000 barrels a day more to inventories.

Stock Draws Ahead

Extending the output cut will draw oil out of inventory in the second half of 2017

Source: IEA, OPEC, Bloomberg

There's one thing they both agree on, though. Things will change in the second half of the year (as the chart above shows). If the six-month output cut is extended, as seems likely, inventories could be drawn down at a rate of about 1.2 million barrels a day in the third quarter. But extending the cuts will be painful for producers. Many, within OPEC and outside, have brought forward planned maintenance (which involves shutting production) to help reach their targets. They won't be able to repeat that trick later in the year.

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

    To contact the author of this story:
    Julian Lee in London at jlee1627@bloomberg.net

    To contact the editor responsible for this story:
    James Boxell at jboxell@bloomberg.net

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