OPEC supply surge has left oil market nursing a hangover: Kemp

OPEC’s overproduction end of 2016 delayed eventual draw down in crude stocks

By John Kemp

OPEC members have reportedly achieved a high level of compliance with the production cuts announced in Nov. but their efforts to ramp up output ahead of the accord have left the market with a nasty hangover from 2016.

Compliance has been estimated at between 80 per cent and 100 per cent by the major reporting agencies, as deeper cuts by Saudi Arabia and some of its allies make up for poorer compliance by other members.

OPEC delivered 82 per cent of its promised cut of 1.17 million barrels per day in Jan. according to Reuters, but as much as 98 per cent according to Argus.

The problem is that many OPEC and non-OPEC countries ramped up production during the second half of 2016, especially during the final three months of the year before the agreement came into force.

Prior production increases have raised stocks and pushed back the time horizon for market rebalancing (“OPEC plays chicken game while oil prices fall“, Reuters, Nov. 11).

Some of the extra oil produced between October and December is now arriving in the United States given voyaging times from the Middle East Gulf to the eastern United States ranging from 30-60 days.

US crude imports have been trending higher since November, according to an analysis of data from the US Energy Information Administration.

Four-week average imports have climbed from 7.7 million barrels per day at the end of Oct. to 8.4 million barrels per day at the end of Jan.

Imports accelerated to almost 9.4 million barrels per day in the week ending on Feb. 3, the fastest rate since Sept. 2012.

Imports have helped keep reported US crude stockpiles high which has arrested the upward trend in oil prices and calendar spreads.

US crude oil stocks rose by almost 29 million barrels during the first 34 days of 2017 compared with a 10-year average increase of less than 13 million barrels.

If OPEC can maintain a high level of compliance, US crude imports should start to decline within the next 3-4 weeks as the last of the extra tankers arrive and unload and the cutbacks start to bite.

But OPEC’s overproduction at the end of 2016 has delayed the eventual draw down in crude stocks and made the task of rebalancing harder.

OPEC will almost certainly need to extend its current six-month production accord if the organisation wants to push the crude market into a deficit in the second half of 2017 and eliminate excess inventories.