Two months ago we first suggested that OPEC may be fabricating data about its production cuts - and certainly overstating the "success" of the Vienna production cut deal - by looking at the rising Chinese oil imports, and by extension, rising oil deliveries by OPEC nations.
As JPMorgan wrote back in February, the IEA estimated that OPEC crude oil production fell by 1mbd to 32.06mbd in January, suggesting an initial compliance of 90 percent with the output agreement reached at the end of 2016. The latest oil supply details released by Chinese customs on Monday suggest a reduction of supplies was not yet seen by China, the world’s largest oil importer.
In fact, quite the contrary: crude oil shipments from the 11 OPEC nations rose 4 percent from December 2016 - in a time when production was supposed to be declining - to 4.6mbd in January, accounting for 57 percent of China’s total oil imports.
Fast forward two months when Reuters analyst Clyde Russell looks at the same data and asks whether "it is time to call the crude oil output cuts by OPEC and its allies a failure?"
Echoing what we cautioned two months ago, Russell said that "certainly there is an increasing disconnect between the rhetoric of OPEC and other producers cutting output on the one hand and the reality of a well-supplied crude oil market and mixed signals on the level of global inventories on the other." Related: Saudis Further Discount Crude To Asia
The paradox: on one hand, OPEC and non-OPEC producer nations, including Russia, have been touting the high compliance with the agreement to reduce output by 1.8 million barrels per day (bpd) from January to June. Having failed to boost the price of crude sustainably above $50, OPEC is now set to prolong the deal for another six months, with the announcement expected at a meeting scheduled for May 25. Needless to say, Russell is skeptical that merely extending what (N)OPEC tried before for another six months, will succeed.
When the deal took effect from Jan. 1, Brent traded in a narrow range for two months, before falling sharply in early March, but the support level of $50 held, with only a brief foray to an intraday low of $49.71 on March 22.
But Brent is once again testing the bottom of the post-agreement range, dropping to as low as $51.42 a barrel on Monday, as skepticism mounts over the ultimate effectiveness of the OPEC measures.
And it is here where Russell notes that, more important for determining the longer-term price outlook is to look at the amount of oil available and the levels of inventories, something we have been skeptical about since the Vienna summit, and certainly since our February article.
The math is simple: for OPEC and its allies to achieve their aim of sustainable higher prices, both global supplies and inventories have to be reduced. Yet "it's here that the main evidence of the failure of the OPEC agreement is to be found."
As the charts below demonstrate, oil shipments by tanker around the globe were at a record high in April, according to vessel-tracking data compiled by Thomson Reuters Supply Chain and Commodity forecasts. As of last week, the data shows that an average 50.3 million barrels per day (bpd) of crude is being shipped in April, up from the previous record 46.1 million bpd in January. While the data excludes crude moved by pipelines, it's extremely unlikely that pipeline supplies have been cut by more than seaborne cargoes have increased.
Worse, the data also shows that Saudi Arabia, which set out to make the largest output cut among those producer’s party to the November deal, is actually increasing tanker shipments in recent months, to levels well above those that prevailed late last year.
In short, OPEC may be producing less - if one only believes the OPEC-sourced data - but actual global deliveries of oil have never been higher!
And here are the four charts in question which prompted Russell to declare the OPEC deal a failure.
(Click to enlarge)
Some more details: Saudis are expected to ship 8.29 million bpd in April, up from 7.94 million bpd in March, 7.73 million bpd in February and 7.83 million bpd in January. Furthermore, Chinese customs data released last week showed that the world's biggest crude importer received higher supplies from Saudi Arabia, Russia, Angola, Iran and Iraq in March than it did the previous month.
Repeating virtually verbatim what we said two months ago, Reuters then goes on to say that "the Chinese numbers don't exactly fit in with the narrative of successful output cuts, rather they show the opposite."
For those confused, what the above means is that a picture emerges in which there is a gaping difference between reducing output and actually cutting supplies. As a result, while it is likely the case that OPEC and its allies have been in high compliance with their agreed output cuts, it hasn't necessarily translated into significantly lower shipments of crude oil.
Then there is, of course, the shale wildcard: U.S. producers outside the agreement have been increasing production and shipments. The plentiful supply of oil can be seen in global inventories, with the International Energy Agency saying recently that “inventories in industrialized countries were still 10 percent above their five-year average." Related: South Africa’s Huge Bet On Nuclear Energy
There is some good news for oil bulls: "barrels stored in less visible places, such as in developing nations and in floating storage, do appear to be drawing down, but there is a question mark over whether this is happening fast enough to provide a basis for higher oil prices in future months. But for OPEC and its allies to achieve lasting success, they will actually have to reduce the amount of crude being shipped."
So far, not only has that not happened, but the Vienna deal participants have been aggressively boosting deliveries in behind the scenes attempts to capture market share from each other.
In a separate report from Bloomberg, according to the head of research at Abu Dhabi Investment Authority, Saudi Arabia - the world’s biggest crude exporter - has been rapidly losing market share to Iraq and Iran as a result of OPEC’s agreement to curb supplies in order to bolster prices, “If you’re talking about winners, you can count Iran and Iraq,” Christof Ruehl said Wednesday at a conference in Dubai.
OPEC agreed to production limits for most of its members at a meeting in November and brought 11 other nations on board with the deal in December. Saudi Arabia, OPEC’s biggest producer, agreed to cut output by 486,000 barrels a day while Iraq said it would cut 210,000 barrels a day. Iran was permitted to increase output by 90,000 barrels a day, according to the OPEC accord.
Ironically, U.S. shale production has increased by almost exactly the amount that Saudi production has declined by, suggesting that Saudi Arabia is losing market share not only to Iraq and Iran, but also to US oil producers.
Saudi Arabia knew it would lose share because Iran’s production was on the rebound, said Robin Mills, founder of Dubai-based consultant Qamar Energy. “The Saudis agreed to production cuts at a time when Iranian production was at a high.”
The struggle over market share is most pronounced in Asia, according to Mills and Edward Bell, commodities analyst at Dubai-based lender Emirates NBD PJSC. Iran and Iraq increased crude sales to China last month, while Saudi Arabia slipped behind Russia and Angola as the largest suppliers to the nation, data released Tuesday by the General Administration of Customs show.
“The Saudis are losing out because other countries are able to squeeze out more production,” Bell of Emirates NBD said. Saudi Arabia is cutting crude pricing to Asia to hold on to its share, Bell said. The kingdom just released its official crude pricing for June, once again cutting prices to Asia in a bid to defend its market share.
The bottom line, according to Russell, is that it doesn't matter how much you talk about reducing output or drawing down producer inventories, what ultimately matters for the price is the amount of crude that buyers can access. And right now, the data on crude flows indicates that the OPEC deal is failing, even as Saudi Arabia is facing increasing market share losses, which will sooner or later prompt the kingdom to aggressively undercut its competition once prices fail to rebound materially, sending the price of crude tumbling once again, as OPEC goes back to square one in a world where the real question market is not the future of supply, but what happens to demand.
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