Tuesday, May 23, 2017

OPEC’s Foil: It Can’t Drain Enough Stored Oil

Cartel is doubling down on its production cuts to drain glutted inventories.

By Georgi Kantchev, Sarah McFarlane and Benoit Faucon
The Wall Street Journal
May 23, 2017

OPEC is likely to extend and perhaps even deepen its production cuts on Thursday for one main reason: It has failed to drain super high levels of oil in storage enough to raise prices significantly.

On Sunday, Khalid al-Falih, energy minister for the Organization of the Petroleum Exporting Countries’ top producer, Saudi Arabia, said OPEC and its production-cutting allies need to keep holding back output for another nine months. The group’s top leaders meet in Vienna on Thursday to make a decision.

“We are all ready to consider other creative suggestions that may emerge to between now and May 25,” Mr. Falih told reporters in Riyadh.

OPEC’s predicament underscores the powerful role global oil inventories now play, after years of being a technical detail that some traders ignored. With more data available than ever, oil storage has joined shale production as a symbol of a global glut of crude that has knocked OPEC on its heels.

“The production deal was a risky maneuver by OPEC,” said Antoine Halff, senior researcher at Columbia University’s Center on Global Energy Policy. “By choosing a storage target, they set themselves up for failure.”

Almost six months after OPEC’s 13 members and 11 other heavyweight producers pledged to cut around 2% of global oil supply, stored crude has only recently begun falling and remains at historically high levels. Oil prices were up almost 1% at $51.12 a barrel on Monday but remain below the levels reached in the days after the production cut’s announcement and short of the $60 a barrel target that Saudi Arabia wants.

OPEC leaders say they want to reduce storage levels in the Organization for Economic Cooperation and Development—a club of industrialized countries like the U.S.—to a five-year average. About 550 million barrels of crude and oil products have been added to the world’s stocks since 2014, when prices began crashing, said Christopher Bake, a member of the executive committee at the world’s largest oil trader Vitol Group.

OPEC leaders have said they want to siphon off over 300 million barrels of crude oil from OECD stocks, which reached record highs of over 3 billion barrels last year.

But OECD stocks continued increasing in early 2017 and fell in March by just 32 million barrels, according to the International Energy Agency, a global adviser to oil-consuming places such as the U.S., India and Europe. Even if the OPEC and non-OPEC cuts are extended into the second half of 2017, stocks won’t draw down to the five-year average this year, the IEA said.

An OPEC official said the group’s plan was beginning to work and merely needed more time.

“Stocks are now coming down,” the official said.

The official said OPEC was also concerned about high inventories in 2008 and 2009, when the global economic crisis depressed demand and prices, sending storage levels higher. Storage levels eventually fell, and prices rose, in 2009 as the crisis abated and oil demand growth returned.

OPEC focus on storage levels came after the cartel was humbled by U.S. shale production’s ability to withstand low prices. Now the group has found that its power to flush oil out of storage is also limited.

One of the main culprits might be OPEC itself—the group ramped up output just before the cuts were slated to start in January, adding to the world’s already vast oversupply. According to data from oil-tanker tracking firm Kpler, OPEC’s January to April exports were in line with the same period last year, meaning just as much oil has hit the global market after the cuts.

“OPEC itself delayed reaching the inventories goal by increasing production late last year,” said Olivier Jakob, managing director of consultancy Petromatrix.

OECD storage is only a slice of what investors are looking at. More than half of the world’s oil refining capacity is now outside of the OECD, in countries like China and India, where accurate storage data is difficult to come by.

China made significant inventory drawdowns early in the year followed by large inventory builds to recover to an oil stock level of 783 million barrels as of May 17, according to data from global storage monitoring firm Ursa Space Systems Inc., which monitors 75% of China’s storage capacity

Saudi Arabia’s stocks rose by 2.3%, or 6 million barrels, over February and March, according to the Joint Organisations Data Initiative, a group based in Riyadh that compiles oil industry information. According to Kpler, stocks appear to be falling in major oil storage hubs in the Caribbean and South Africa.

There is also less oil being held in giant tankers at sea, an expensive way to hoard oil but one that became common during the glut. According to Kpler, the volume of oil held on ships had fallen around 23% from December to 91.1 million barrels at the end of April.

“If they continue to fall, that will give the market some new confidence,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas .

But there are some ominous signs for OPEC and any extended bet to reduce oil storage.

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