Opec has success at last, but oil revival may be short-lived

LONDON: When Opec and its allies gather this week, they’ll have the best evidence yet that their efforts to clear a global oil glut are succeeding. It may prove short-lived.

Crude prices have rebounded to a three-month high and the world’s bloated fuel inventories are shrinking, signalling that nine months of production cuts by the alliance of the Organisation of the Petroleum Exporting Countries and nations including Russia are at last paying off. Yet as US shale oil continues to thrive and seasonal demand wanes, the surplus that has weighed on markets for three years looks set to come back.

“The strategy finally has a window of opportunity in which it can work,” said Ed Morse, head of commodities research at Citigroup Inc in New York. Even so, “Opec has clearly lost the long-term battle against shale”.

Opec and Russia have spearheaded an effort to rebalance world markets, seeking to end a price rout that has battered oil producers’ economies since 2014.

After production cuts as deep as 1.8 million barrels a day, a committee will review progress on Sept 22, before ministers meet in November to decide if the strategy needs more time to achieve its goals.

As they discuss the market this week in Vienna, officials will be looking at much more favourable market indicators than at previous meetings.

Opec members are together making almost all the supply reductions they pledged, and for the first time since the agreement started in January their 10 outside partners have also delivered all of their promised cutbacks.

As a result, the surplus in oil stockpiles – Opec’s main metric for assessing the deal – has diminished. Excess inventories in developed economies, measured against their five-year average, have declined by about 74 million barrels, or 28%, since the start of the year, according to the International Energy Agency (IEA), which advises most major economies on energy policy.

Dwindling stockpiles are being reflected in prices. Brent crude, the international benchmark, has gained more than 20% since June 21 to US$55.34 a barrel as of 9:20 am in London yesterday. The discount on immediate supplies of Brent compared with later months – a sign of surplus that has pre- vailed for most of the past three years – has turned into a premium. The price of cargoes of North Sea crude such as Forties and Ekofisk rose to multi-year highs this month.

“Opec have done very, very well – finally,” said Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd.

“The price of oil has recovered quite a bit, but more importantly I’d say the physical market has recovered quite substantially.”

For Opec, this could be as good as it gets. Fuel demand is about to taper off as summer consumption of gasoline fades. Bigger problems may lie ahead in 2018 when production growth outside Opec – led by US shale – outstrips the expansion in demand and puts the market back in surplus, according to the IEA.