Draining Global Oil Stockpiles may not be Possible by OPEC’s Historic Deal

OPEC’s production cut looks set to fall short of its stated goal of draining the stockpiles that are depressing prices even though OPEC is likely to bring the oil market into balance by the middle of next year.

Bringing an end to more than three years when supply exceeded demand, the oil market will rebalance “toward the middle of next year,” according to Nigeria’s Minister of State for Petroleum Emmanuel Kachikwu.

Even if the group convinces non-members to join supply curbs at a meeting on Saturday, cCalculations based on OPEC data show that across the whole of 2017 there will be little overall reduction in record oil inventories.

“Even with 100 percent compliance from both OPEC and non-OPEC producers global stocks are unlikely to fall in the first half of 2017,” said Tamas Varga, analyst at brokerage PVM Oil Associates Ltd. in London. “That should keep oil prices in check.”

Echoing a widely held view within the group, from Saudi Arabia to Iran, Venezuelan Oil Minister Eulogio del Pino said last week that crude prices could rise to $60 to $70 a barrel if the Organization of Petroleum Exporting Countries succeeds in bring inventories back to a normal level.

The group only delivers 80 percent of promised cuts, OPEC’s track record shows. Some non-OPEC producers, such as Mexico, Azerbaijan and Colombia, are likely to dress up involuntary production declines, already factored in by traders, as cuts while Russia has pledged to come to the party and lower output by 300,000 barrels a day in the first half of 2017. That scenario would leave largely unchanged the 300 million-barrel global stockpile surplus Del Pino and his colleagues are targeting.

An optimistic scenario shows the call on the group’s supply exceeding its output by 1.2 million barrels a day in third quarter and OPEC has said its agreement will accelerate the decline of global stockpiles. That depends for Russia to make good on its pledge, even as other non-OPEC producers make little contribution and on full compliance by OPEC members.

The re-balancing will happen early next year, expect the International Energy Agency. if Russia is the only non-OPEC country to join the effort, consultants at Rystad Energy expect a 1.26 million barrels-a-day deficit in the first quarter of next year.

Ali Al-Naimi, former Saudi oil minister, said last week that the oil-club members “tend to cheat” and hence assuming OPEC will stick to its promise could be wishful thinking.

The media cite people familiar with the talks, who asked not to be named because the discussions are private, saying that OPEC is ready to accept that other non-OPEC nations pledge natural declines for a large chunk of their production cuts as long as Russia makes a genuine output cut. That will mean the re-balancing will take longer.

OPEC would need non-OPEC rivals to deliver a genuine 600,000 barrels a day cut to make a significant dent in global oil stocks next year in a less optimistic scenario, in which OPEC only delivers 80 percent of its promised cut.

Despite Russia’s pledge, Moscow is only willing to reduce output gradually.

“The Russian production cut will become visible only in spring,” said Christian Boermel, Russia analyst at consultant Wood Mackenzie Ltd. “Just as Russia made its compliance contingent on OPEC cutting its share, some countries might get suspicious if in the first months no results are seen.”

(Adapted from Bloomberg)

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