Thursday, June 15, 2017

OPEC Stumbles In Face Of Oil Glut

Production cuts aren’t drawing oil out of storage and are helping U.S. shale producers.


By Summer Said, Georgi Kantchev and Neanda Salvaterra
The Wall Street Journal
June 15, 2017

OPEC is running smack into a wall of crude-oil storage.

The global oil glut is proving immune to the limits set by the Organization of the Petroleum Exporting Countries and its big-producer allies like Russia, fueling the idea that output caps withholding almost 2% of world crude supply were a miscalculation.

Both Brent, the international benchmark, and West Texas Intermediate, the U.S. price setter, fell almost 4% to their lowest levels of 2017 on Wednesday after the release of fresh data about inventories. Overall, prices are down over 17% since the beginning of the year.

In the U.S., the Energy Information Administration said Wednesday that crude stockpiles fell last week by 1.7 million barrels, less than the 2.6 million drop forecast by a Wall Street Journal survey. At the same time, gasoline inventories rose by 2.1 million barrels, compared with the survey’s expectation of a 700,000 decline, underlining worries about the oversupply extending to crude oil’s products.

Oil stockpiles in the Organization for Economic Cooperation and Development—a club of 35 countries with industrialized economies—rose by 18.6 million barrels in April and were higher than they were when OPEC agreed to its cut late last year, said the International Energy Agency, a Paris-based group that advises governments on energy trends.

“There’s still so much crude in storage," said Doug King, chief investment officer at RCMA Asset Management and manager of that firm’s $200 million Merchant Commodity hedge fund. “OPEC needs much deeper cuts to draw inventory.”

Adding to oil traders’ angst: U.S. oil production has come roaring back to life. The IEA said U.S. crude supply will grow almost 5% on average this year, and nearly 8% in 2018, potentially vaulting American producers ahead of Saudi Arabia in daily output.

“Such is the dynamism of this extraordinary, very diverse industry it is possible that growth will be faster,” the IEA said.

With shale producers humming and storage tanks still brimming full of crude, the production limits that OPEC, Russia and others have approved through March 2018 are coming under heightened scrutiny. Bjarne Schieldrop, chief commodities analyst at SEB Markets, the Nordic bank, called it an “error.”

“It would stimulate production in the U.S. too much and this is basically what we are seeing,” he said.

OPEC and its leader, Saudi Arabia, the world’s largest exporter, had resisted cutting output when oil prices began crashing in the summer and fall of 2014, reasoning it couldn’t stop the market slide on its own. It changed course late last year after bringing Russia and 10 other non-OPEC producers on board for almost 600,000 barrels a day in cuts.

But even those combined efforts have done little to drain oil in storage. Eugen Weinberg, an oil analyst at Commerzbank, said OPEC needed to end its production cut.

“The only option that OPEC has for the next five years is to let the market go,” said Mr. Weinberg.

OPEC representatives said Wednesday that the rising inventories were concerning but that they couldn’t abandon the production-cut deal. They pointed to a problem of rising production from Libya and Nigeria, which were exempted from obligations.

“The market fundamentals are improving and there are signs that stocks are going down, but only time would tell if we have made the right decision or not,” said a senior OPEC official from a Persian Gulf oil-producing country.

Saudi energy minister Khalid al-Falih said this week that the production cuts would start having an impact this summer, accelerating a drop in stored oil that OPEC said began in January. He has said OPEC and Russia would do “whatever it takes” to bring supply back in line with demand.

Daniel Yergin, vice chairman of IHS Markit and a long-time oil market watcher, said OPEC wouldn’t abandon its production-cut agreement, which took almost a year to put together through 2016.

“When OPEC and the other producers agreed to this deal, they hoped that, as the old adage says, time heals all—and time will heal the inventory problem,” Mr. Yergin said. “They should now take a deep breath and realize this will take a lot more time.”

OPEC this week acknowledged that its efforts weren’t working as quickly as it thought. In its own monthly market report, the cartel on Tuesday blamed U.S. shale for slowing its rebalancing efforts.

The cartel set a tough goal last December, when its officials said they wanted to cut oil-storage levels to the five-year average.

OPEC said OECD storage levels actually have been falling but by only 88 million barrels in the first four months of 2017. At that pace, it would take until March 2018 for stockpiles to fall another 250 million barrels to the five-year average.

In 2018, non-OPEC production is set to increase by 1.5 million barrels a day, the IEA said, more than the 1.4 million barrels of growth forecast for world consumption. That means OPEC could have to sacrifice more market share over a longer period to maintain its output cuts.


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