The One Indicator OPEC Must Watch

Tyler Durden's picture

Authored by Nick Cunningham via OilPrice.com,

“We will not let go of our current approach until we reach a balanced market,” Saudi oil minister Khalid al-Falih said Monday at a news conference in Riyadh.

OPEC ended months of speculation last week when it decided to extend its production cuts through the end of 2018, easing concerns that the limits would be lifted before the oil market was ready. But while it put some uncertainty to rest, the next question is what OPEC does when the oil market becomes “balanced”? What is the exit strategy?

There isn’t one at the moment, and we can assume OPEC doesn’t know what comes next. But we do know that the group has one key metric in mind: inventories. The target is to bring global oil inventories back down to the five-year average.

Oil inventories exploded between 2014 and 2017, hitting record levels that left the world awash in oil. That metric, arguably more than any other, exemplified the glut of supply that led to the crash of prices.

It has been a stubborn thing, getting those inventories back down to average levels. A wave of shale bankruptcies didn’t do it, the vanishing rig count didn’t do it either. That led OPEC and a handful of non-OPEC countries led by Russia to limit their production. But even that deal didn’t seem to be doing the trick at the start of 2017, as inventories remained stuck at elevated levels. The euphoria that followed the announcement of the initial deal gave way to a renewed sense of gloom, which pushed WTI back down into the low-$40s by mid-2017.

However, by the end of summer, the inventories finally started to move. And the declines accelerated in recent months, draining stocks at a rapid clip. Total crude and refined product inventories in OECD countries (the most visible and transparent metric used) has dropped to only 140 million barrels above the five-year average as of October, cutting the surplus from the start of 2017 by more than half.

(Click to enlarge)

The big question is when that surplus shrinks to zero. Saudi oil minister Khalid al-Falih warned that winter months tend to bring a dip in demand, which could meant the drawdowns slow for the rest of this year and in the first quarter of 2018. As such, the real progress won’t begin until probably the second quarter.

Aiding in OPEC’s effort is that the definition of “average” is constantly changing. With each passing day, the previous five years is increasingly made up of periods of time in which the oil market was in a glut. So, the “average” level for oil inventories today is a lot higher than it was three years ago. That means OPEC could achieve its objective with a lot more ease than if the target level was a fixed figure.

Demand is growing strongly, which will help soak up excess barrels as we head into next year. The supply picture is mixed, however. There is rising production in the U.S., Canada, Brazil and some other non-OPEC countries. On the other hand, OPEC countries will keep their output in check, and the inclusion of Nigeria and Libya under the cap will keep supply off the market. And Venezuela’s production will continue to fall.

Although estimates vary, the IEA sees the supply surplus returning - in the first quarter of 2018, the energy agency sees a glut of 0.6 mb/d. In other words, inventories could swell for a period of time, although OPEC is not as pessimistic. But both agree that by mid-year, the drawdowns will really pick up pace, and the objective of “balancing” the market will draw near.

That makes the review period for OPEC’s production limits in June very important. At that point, OPEC and non-OPEC countries will have to come up with an exit strategy.

“The outlook for when we will hit the balanced market will be clearer in June, and we will start thinking of what we will do in 2019,” al-Falih told reporters on Monday.

 

“The intent is not overnight to open the taps and flood the market.”

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Doña K's picture

Oil had been as low as $10. Yes sometime ago. If you consider population growth and inflation and today's demand, oil should be around $25 to $30. I will work this out and post again.

Oracle of Kypseli's picture

You should also consider the many additional storage tanks built lately, some of them secret and some underground, to hide stock.

A82EBA's picture

im thinking about spending one bitcoin for 10 oz gold...nah ill wait

Arnold's picture

They are buying time.
The spring offensive should be epic.
Drawn down reserves, financial turmoil, another couple of natural and unnatural disasters.

BadaBing, to the moon.
Besides, Chanukah is approaching quickly.

BritBob's picture

Falklands Oil

By a ruling of the UN, Argentina will extend its maritime platform (Politica Argentina) ; New map of the maritime platform reaffirms the sovereignty of Malvinas with UN endorsement (ElCronista); Argentina enlarges its territory 35%, with a UN endorsement ...(La Capital).To add to this euphoric atmosphere the Argentine Foreign Minister stated, ''This is a historic opportunity for Argentina. We have taken a great step in the demarcation of the outer limit of our continental shelf; the most extensive boundary of Argentina and our border with humanity,'' Foreign Minister Susana Malcorra told La Nacion, which tomorrow will publicly announce the details of this resolution. (Susana Malcorra, quoted by Dinatale M, La Nacion, Argentina, 27 March 2016).

 

But what is the truth...

Argentina's Continental Shelf Claims and The UN CLCA Commission (1 page):-

https://www.academia.edu/33898951/Argentinas_Continental_Shelf_Claims_-The_UN_CLCS_Commission

 

A. Boaty's picture

I will tell you the truth. You live across an ocean from Argentina. Mind your own business.

A. Boaty's picture

Shed a tear for those who fought and died to keep Argentina British.

Last of the Middle Class's picture

They'll pump soon. The economics of their economy's demand it. Oil prices are still soft as hell. The irony is that if a really great tax bill had passed their prices would have hardened and risen almost overnight as the consumer started spending again. Fucking hilarious to watch the camel jockeys fuck themselves into irrelevance. 

Kefeer's picture

So much for the original narrative that OPEC would flood the market and drive down the price to kill American fracking.  What happened to that strategy?  People BS all the time and are full of the same.

Arnold's picture

The Chinks can't refine seawater into useable distillates.