OPEC’s focus on stocks risks prices overshooting
LONDON: The Organization of the Petroleum Exporting Countries (OPEC) is sticking doggedly to its plan to cut commercial oil inventories down to the fiveyear average to rebalance the oil market. But in doing so, the organization risks tightening the market too much, sending prices sharply higher and encouraging a faster-than-expected acceleration in production from US shale producers.
Saudi Arabia’s oil minister, who is the organization’s de facto leader, has reiterated that stocks are still around 150 million barrels too high and it would be premature to discuss an exit strategy or change of course. “Almost the single metric we look at is global inventories and of course the most transparent and trustworthy is the OECD,” he said in an interview before Christmas. OPEC, the International Energy Agency (IEA) and the US Energy Information Administration (EIA) all have slightly different figures for OECD commercial crude and products stocks, but they show a similar trend. OPEC estimates that total stocks were around 137 million barrels higher than the five-year average in October, down by around half since May. IEA puts commercial stocks about 111 million barrels above the prior five-year average at the end of October. EIA data shows commercial stocks 167 million barrels above the five-year seasonal average at the end of October, down from a surplus of 380 million barrels in July 2016
While the specific numbers differ, mostly for definitional and methodological reasons, the data from each of the agencies shows the stock overhang compared with the fiveyear average has narrowed significantly. Most of the remaining overhang is concentrated in crude oil rather than refined products such as gasoline and heating oil. Product inventories are already tight in some cases, notably for middle distillates such as gasoil, diesel fuel and heating oil. OPEC seems determined to drive total stocks down to the five-year average, or very close to it, before starting to increase its own output. But that would almost certainly leave stockpiles uncomfortably low, send benchmark Brent prices well above $70 per barrel and push the market into a big backwardation. — Reuters