Another week brings yet more signs that the highly-anticipated oil market “balance” will not occur in the immediate future. Heading into 2017, there was a broad consensus that global oil production would fall below demand in the first half of the year, a deficit that would help bring down inventories and lead to relative balance between supply and demand. Mid-2017 seemed to be the timeframe that everyone was looking at for this development to occur.
But there are growing signs that the oil market won’t reach balance by then, and perhaps not this year at all. “We don’t really see a real balancing of the market coming until much much later,” Richard Gorry of JBC Energy Asia told CNBC in an interview. “Right now the oil market is oversupplied by about 500,000 barrels per day in the first quarter. So to see inventories continue to go up is absolutely of no surprise to us.”
The EIA reported yet another massive build in crude oil inventories last week. Crude stocks surged by 9.5 million barrels for the week ending in February 10, taking total stocks up to 518 million barrels. That is a new record high, blowing past the record set last year at 512 million barrels. Oil inventories are higher than at any point since data collection began, dating back to the early 1980s.
Oil inventories have climbed sharply this year, but in recent weeks some investors took solace in the fact that gasoline stocks had tightened a bit even as crude inventories rose, hoping that was a sign of robust demand. Not so for last week – gasoline stocks rose by nearly 3 million barrels, deflating hopes that consumers would help bring down excess supplies. Related: Total Going On The Offensive
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Rising inventories backs up the argument by JBC Energy Asia that the market is still oversupplied. That stands in sharp contrast with the IEA’s projection that the market will be in a supply deficit on the order of 600,000 bpd in the first six months of 2017, assuming OPEC compliance.
On the OPEC front, Reuters reports that the cartel is preparing to extend the production cut deal beyond the June expiration date if global inventories fail to fall sufficiently. The comments were initially taken as a bullish sign on February 16, with oil prices jumping on the news. But the good mood didn’t last – WTI and Brent quickly gave up their gains. "We were up at first on word OPEC may extend output deal, but there is so much supply in the market that their rhetorical prowess is on the wane," John Kilduff, founding partner of Again Capital, told CNBC. Indeed, the fact that OPEC now deems it necessary to extend the cuts for another six months is a bearish signal, not a bullish one. If the oil market was actually on the mend they would declare “mission accomplished” at their June meeting and let the deal expire.
To be sure, an extension of the cuts would certainly help accelerate the adjustment by keeping some 1 million barrels per day of supply off of the market for longer. But it is also not a vote of confidence in the current trajectory of the market. Moreover, the longer the deal wears on, the more likely members are going to be tempted to cheat. On top of that U.S. output is rising quicker than expected, and countries like Libya and Nigeria are undermining the effectiveness of the deal by bringing production back online. Related: Are Oil Markets Ignoring Demand?
In fact, Libyan officials just said that output has climbed above 700,000 bpd and rising. Libya is targeting 1.2 mb/d by August – a much more substantial increase than previously expected and on a much faster timeline. And by March 2018 they hope to have output up to 1.7 mb/d. Projections like these should be taken with a large grain of salt, but if Libya is successful it will add as much new supply as all of OPEC is currently cutting.
As a result, the OPEC deal might not be enough to push oil prices up any higher. But Richard Gorry of JBC Energy Asia said that those hoping for higher oil prices on the deal were misguided from the start. “I don’t think that [OPEC’s] goal was to push the oil price up to $70 or something in that range. They were really trying to protect the oil price on the downside…I think they knew that the market wouldn’t be rebalanced, but they were making sure that the producers were protected on the downside,” Gory said on CNBC. “Don’t expect $70 oil because that was not the objective.”
By Nick Cunningham of Oilprice.com
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