As OPEC's latest meeting concludes in Vienna, just a glimpse at the charts below helps explain why the cartel's production cut deal has been extended for another nine months: it hasn't worked so far.
For all the talk of near-perfect compliance from OPEC, we have consistently highlighted how the cartel has kept global markets well-supplied, as apparent production cuts have not been reflected through to broad-based and consistently lower exports.
We discussed last week how U.S. oil imports from OPEC were holding up. Deliveries to the U.S. in May have now lifted above year-ago levels, meaning OPEC deliveries have been higher than year-ago levels for every month of this year, up 11 percent on aggregate:
This theme of stronger imports into key demand regions is playing out across the board. As our ClipperData illustrate below, OPEC flows into China continue to outpace year-ago levels. China is the leading destination of OPEC barrels, and imports into the largest emerging market are up over 13 percent compared to the first five months of last year:
According to the FT, India's minister of petroleum and natural gas, Dharmendra Pradhan, said the country is evaluating buying crude from other sources other than OPEC - such as the U.S. - given the potential supply threat the cartel poses to its energy security.
This threat comes via both lower future supplies due to current global underinvestment in new projects, as well as immediate price volatility caused via OPEC production cut compliance / non-compliance.
India imports approximately 85 percent of its crude from OPEC. Ten producers from the cartel have delivered crude to India so far this year, with Saudi Arabia and Iraq slugging it out to be the leading supplier. As our ClipperData illustrate below, after lagging year-ago levels in January and February, deliveries have been higher in the last three months. This is reflective of relatively stronger Indian imports versus year-ago levels as much as anything.
(Click to enlarge)
Mexico is the leading non-OPEC supplier of crude to India, delivering ~150,000 bpd so far this year. We discussed earlier in the month how Pemex highlighted that Mexican crude exports hit a record low in March, and how our data show they ticked even lower in April. Nonetheless, Mexico is keeping its leading destinations well-supplied. While India receives 85 percent of its crude from OPEC, Mexico sends 85 percent of its crude to three countries: India, the U.S. and Spain:
(Click to enlarge)
The counter-argument to OPEC's failure is presented in this piece on Bloomberg. It makes the case that OPEC is not targeting normalizing inventories as much as it is targeting higher revenues - which kinda makes sense when you think about it.
The IEA estimates that OPEC earned $75 million a day more in Q1 of this year compared to Q4 2016, as higher prices more than outweighed lower output. Perhaps their game plan is working out after all.
By Matt Smith
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