Commodities

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

OPEC oil producers have made it clear that "doing whatever it takes" doesn't include making deeper output cuts. It is time for the oil producer group to switch its focus from managing production to managing exports, and let the market take the strain in monitoring compliance.

Exemplary compliance with output cuts has done little to boost oil prices. Yes, I know, the current $55 a barrel for Brent is a huge improvement on the low of less than $28 that it reached in January 2016, but it is still roughly half what was 18 months earlier.

L-shaped Recovery
Crude prices remain stuck around $50-$60 per barrel after seven months of OPEC cuts.
Source: Bloomberg
NOTE: ICE Brent futures.

While oil inventories are falling in the developed countries, they have remained stubbornly high globally. Thirteen consecutive quarters of global stock builds only came to an end in the second quarter, according to the most recent data from the International Energy Agency. Those same data suggest that last quarter's draw will be a one-off and that stocks will build again during the current quarter and for much of next year.

Stock Draw?
2Q17 was the first quarter in 14 in which global oil inventories fell - it may not last
Source: International Energy Agency
Note: Figures for 3Q17 onwards are forecasts. Historical data may be subject to revision.

And with the IEA seeing OPEC already producing more than the world will need from it next year, extending the cuts through the end of 2018 won't address the problem either (unless demand turns out to be a lot stronger than forecast next year, which is certainly possible if the early part of this year is anything to go by). 

Deeper cuts appear to be a step that producers are not yet willing to take. So what else can they do?

They can tackle their credibility problem.

OPEC's production data is opaque, it isn't independently verified and often it doesn't reflect volumes supplied to the market. Just look at the differences in assessments of individual countries' output. Even OPEC doesn't seem to believe its own members' production numbers -- basing its latest output deal on the average of six "independent" assessments of members' output rather than the official numbers provided (or not) by member countries.

Uncertain Supply
Estimates of OPEC's August output vary by 415,000 barrels a day, more than enough to tip the global oil balance from deficit to excess.
Source: Bloomberg
NOTE: Difference from mean estimate of 32.719 million barrels a day.

These independent assessments are, at best, estimates. The result is that traders have no reason to believe them when they say that stockpiles are falling, and they've no reason to bid up the price of oil to reflect shrinking supply.

The most obvious way for OPEC to get around this problem would be to base a deal on what really matters -- supply to the market. Or, in a word, exports.

The fact that tankers are arriving at countries' ports and loading oil, is no shock or secret. Dozens of companies, Bloomberg LP among them, are now monitoring these ships, with varying degrees of accuracy. The only thing that can sometimes be a struggle is specifics.

So, if OPEC wants the market to believe it that supplies are falling, then it needs to insist on just one thing from both its members and non-member states who are participating in output curbs: published, transparent lists of cargoes, how big they are and what they are, spanning both crude and refined fuels.

We don't need to know which companies bought them, we don't need to know how much they paid, we don't even need to know where they are going. We just need to be able to check them off against the ships that we're already monitoring. It won't be difficult and shouldn't even be contentious. Port agents operating at the terminals already have the information, and some of it becomes available in the needed form anyway -- U.S. customs authorities publish detailed information on each cargo that comes into the country.

It is very difficult to see what oil exporting countries have to lose. We can see the ships loading cargoes at their export terminals. We can, and do, estimate the volumes loaded onto them. Telling us what and how much is actually on each ship will create the kind of trust that OPEC's never had before in its history.

I have spent most of the last 30 years of my life being told by OPEC oil ministers past and present how oil is too important to be left to the market to manage the balance of supply and demand. If it is really so strategically important then transparency over its movement is long overdue.

The reward is big, the cost is tiny.

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

  1. Full disclosure: part of the time that I'm not thinking about or penning pieces for Gadfly is spent building up Bloomberg's tanker tracking capability, monitoring ships carrying crude from a variety of oil-producing countries.

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

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net