Is OPEC moving the goalposts for its oil ‘market’ scoreline?

US output adds to complications for cartel and allies

LONDON, March 13, (RTRS): Saudi Arabia’s proposals of new metrics to determine when the oil market is balanced signals a shift in OPEC’s targets for a pact on supply cuts that has almost achieved the initial aim of reducing bloated inventories.

The Organization of the Petroleum Exporting Countries (OPEC), Russia and nine other producers cut output from January 2017 by 1.8 million barrels per day (bpd) with the aim of reducing crude stocks in industrialised OECD nations to the five-year average.

From a record 3.1 billion barrels in July 2016, OECD stocks dropped to 2.851 billion barrels in December, falling 216 million barrels during 2017 and now stand just 52 million barrels above the five-year average, International Energy Agency (IEA) data show.

OPEC and its allies have been helped because the five-year average is a moving target and has risen even as output curbs were in place. The average climbed to 2.86 billion barrels in September 2017 from about 2.73 billion barrels when the supply pact was sealed in late 2016.

“After a period of surplus, the target becomes easier over time as more surplus years are included,” said Standard Chartered head of commodities research Paul Horsnell.

But as the OECD inventory target has shifted so has thinking in Saudi Arabia, the world’s biggest oil exporter that worked with Russia to forge the global pact on cutting supplies.

Saudi Energy Minister Khalid al Falih says OPEC and its partners should look at metrics such as nonOECD inventories, oil in floating storage and crude in transit as they consider the future of the pact that is due to expire at the end of 2018.

Those measures, however, are more difficult to monitor.

Non-OECD oil demand has outstripped OECD consumption since 2014. But inventories in non-OECD nations tend to be held as strategic not commercial assets, making them less transparent and less likely to shift with changes to demand or supply. Falih has said it would be better to “overbalance” the market, by which he means allowing OECD stocks to drop below the five-year average, rather than end the supply deal too early, another hint that the pact’s expiry could be pushed back.

To assess whether supply and demand had achieved a sustainable balance, OPEC could measure the amount of oil in storage against days of demand it covers. This would show whether consumption was enough to avoid rebuilding inventories.

But measuring forward cover may still only offer limited help to OPEC in determining the right time to reopen oil taps, given output from the United States and other non-OPEC producers is climbing. This has capped oil prices around $65 a barrel now, after rising from below $30 at the start of 2016.