• 4 minutes Why does US never need to have an oil production cut?
  • 9 minutes French Fuel Protests
  • 14 minutes Oil Prices
  • 11 hours Pros and Cons of Coal
  • 2 hours Could EVs Become Cheaper than ICE Cars by 2023?
  • 2 hours Your idea of oil/gas prices next ten years
  • 11 hours US continues imports of Russian gas which it insists Europe should stop buying
  • 8 hours The Regime Doesn't Give Up: Rouhani Says Iran to Continue Oil Exports And Resist U.S. Economic War
  • 1 day Warren Buffett
  • 1 day Regular Gas dropped to $2.21 per gallon today
  • 5 hours Is California becoming a National Security Risk to the U.S.?
  • 4 hours Oil
  • 2 days WTI Heading for $60
  • 22 hours And Just Like That, Everybody Stopped Talking About $100 Oil
  • 2 days Trump administration slaps sanctions on Saudis over Khashoggi's death
  • 3 hours Plastic Myth-Busters
Alt Text

Oil Slips As Russia Mulls Production Cuts

Oil fell on Monday morning…

Alt Text

The World's Most Important Oil Region

The Middle East remains crucial…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

More Info

Trending Discussions

Has The OPEC Deal Been A Success?

Oil prices took a hit last week after doubts resurfaced over the odds of an OPEC extension. The chances of an extension still seem good, but ultimately the decision to maintain production cuts will come down to whether or not the participating members view the reductions as a success. So, have the cuts been successful? That depends on your perspective.

One of the key metrics to look at is crude oil inventories, and with data available for the first three months out of the six-month OPEC deal, the picture is decidedly mixed.

On the one hand, the world is still awash with crude oil. Oil inventories in OECD countries surged in January by 70 million barrels, putting total OECD stocks above the 3-billion-barrel mark.

The sharp increase came because of the ramp up in OPEC production at the end of last year just before members had to make cuts in January. The lag time from when the oil was produced and when it made its way to the market meant that inventories –especially in the U.S. – continued to increase in the early part of 2017 even after OPEC countries cut their output. According to the IEA, inventories in OECD countries finally started to drawdown in February and March, although gains in the U.S. through the end of the first quarter meant that the total decrease was rather modest.

Now, U.S. inventories are starting to decline, which means that the overall drop in global inventories is likely to accelerate in the next month or two.

But it might not be fast enough for OPEC to declare victory in June. When OPEC members meet in late May, storage levels in OECD countries might be back right where they started at the beginning of 2017, according to Bloomberg. The drawdowns between February and June will have only managed to cut the equivalent of what was added in January. Or, viewed another way, OPEC’s ramp up in the fourth quarter of 2016 will have more or less offset the reductions made in the first six months of this year. Related: Does The Biggest Winner Of The OPEC Deal Support An Extension?

“Producers unintentionally accelerated activities that would ultimately obstruct, and for a period reverse, the very rebalancing they were trying to accelerate,” said Ed Morse, head of commodities research at Citigroup, according to Bloomberg.

The OPEC cuts of 1.2 million barrels per day, plus the non-OPEC cuts of nearly 600,000 bpd, will have failed to balance the market. Mission Unaccomplished.

However, there is a case to be made that the cuts are working and just need more time. After all, inventories are in fact in decline even if they got off to a late start. There are plenty of voices that see tighter conditions ahead, as ongoing inventory declines take the market back to balance later this year. Goldman Sachs, for example, reiterated its call for Brent oil prices averaging $59 per barrel in the second quarter, and the investment bank attributed recent price declines to technical moves – short-term speculative bets – rather than any shift in the fundamentals. Other investment banks agree. The IEA is also on the side of the OPEC agreement largely being a success, and the Paris-based energy agency says sharper inventory declines are ahead. The end result will be more market balance and higher oil prices.

But a few pieces of suggest that there are still fundamental problems with the oil market. Reuters data shows that the volume of crude oil plying the world’s oceans hit a record high 47.8 million barrels per day in April, a 5.8 percent jump compared to December levels. That is a worrying sign given that December was the month before OPEC began reducing, so if global crude oil shipments are above even those elevated levels, then supply is probably higher right now than many believe. Related: Will Banks Allow Another Slew Of Oil Bankruptcies?

Moreover, the reemergence of the contango in the Brent futures market is another warning sign. The contango – in which near-term oil contracts trade at a discount to futures further out – could be a sign of oversupply, particularly in the Atlantic Basin. A steep enough contango could be a leading indicator of inventory builds. "It will not take much before we see headlines about floating storage starting to increase again," Olivier Jakob, head of oil consultant PetroMatrix GmbH in Switzerland, told Bloomberg.

Robert Yawger, energy futures strategist at Mizuho Americas, put it more bluntly in a Reuters interview. “If they're (OPEC) so busy complying, how come we're taking so much extra inventory? Why is the whole curve in free-fall when supplies are supposedly tightening?”

Some OPEC officials say the supply picture looks worse than it really is because oil inventories are actually declining in places where data is hard to come by. Saudi Arabia, for example, says it has been taking oil out of storage to sell because of its production cuts.

So, has the OPEC deal been successful? That answer is open to interpretation. But one thing is clear, oil prices will rise or fall depending on whether or not the deal is extended.

By Nick Cunningham of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
-->