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C o m m e n t a r y

Taking stock

The landmark production adjustment decisions taken by 24

OPEC and non-OPEC oil producing nations at the end of 2016,

and renewed in May this year, responded to the urgent need

to bring the market rebalancing forward. They specifically

focused on stimulating the acceleration of the drawdown of

the stock overhang. As a result the key ‘stocks’ metric has

been monitored closely by all participants in the ‘Declaration

of Cooperation’. It begs the questions: how have stocks per-

formed so far this year, and perhaps more importantly, what

is the current trend?

In the first quarter of 2017, OECD commercial oil stocks

actually rose by 44 million barrels (m b), much higher than

the seasonal average of 36m b. It should be noted that con-

tributing to this build was the fact that refinery maintenance

globally was much heavier during the first quarter. In January

and February, for example, one million barrels a day (m b/d)

of throughput was shut down formaintenance in theUS alone,

which equated to approximately 60m b.

It is also important to remember that the fourth quar-

ter of 2016 was a period of significantly rising supplies that

were working their way through the market in the early part

of 2017. FromSeptember to November 2016, non-OPEC pro-

duction increasedby around1.8mb/d, whileOPECproduction

increased by about 500,000 b/d. These increases need to be

set against a global demand increase of just 200,000 b/d in

the fourth quarter of 2016, compared to the third quarter.

OECD commercial oil stocks started to fall, however, in

each of the three months comprising the second quarter of

2017. In aggregate, this equated to a drop of close to 9m

b compared to the seasonal average of 45m b. It was clear

evidence that the OECD inventory overhang of crude and oil

products onshore was declining.

The most recent data for July 2017 now shows OECD com-

mercial oil inventories around 195m b above the five-year

average, down 145m b from the close to 340m b seen at the

beginning of 2017. There has been some concern that US

has been an outlier in this trend and there is no doubt that

the US has taken longer to destock, particularly given rising

production there in the first quarter of 2017. However, we

recently witnessed nine consecutive weeks of crude oil stock

draws in the US across the months of July and August. This

amounted to a total drawdown of over 51m b, compared to

the same period in 2016 when US crude oil stock levels were

relatively flat.

It should be noted that the final week of August (week

ending September 1) actually saw a US crude oil stock build

of around 4.5m b, although this was to be expected follow-

ing the refinery outages after Hurricane Harvey hit Texas and

Louisiana.

Floating storage has also been on a declining trend since

June, supported by a narrowing contango. As a whole, indus-

try data for 2017 suggest that crude in floating storage has

fallen by more than 30m b since the beginning of the year.

At the most recent meeting of the Joint Ministerial

Monitoring Committee (JMMC), delegates highlighted the

efforts made by OPEC and participating non-OPEC produc-

ing countries. These have continued to yield positive results

in the joint efforts to achieve the goal of rebalancing the oil

market.

The high conformity levels of participating OPEC and non-

OPECproducing countries, inaccordancewith the ‘Declaration

of Cooperation’, have clearly played a key role in this global

destocking process. Signatories of the Declaration achieved

conformity levels of 98 per cent and 94 per cent in June and

July, respectively, following similar high levels in previous

months.

Over the first half of the year, the collective efforts of par-

ticipating producer nations have pulled close to 350m b in

aggregate from global supply. It is easy to imagine what the

market would have looked like had these 24 countries not

taken such collective action.

With this in mind, the JMMC has expressed great satisfac-

tion with the results achieved so far and with the steady pro-

gress made towards full conformity. At the same time, how-

ever, it has continued to encourage all participating countries

to continue to try to achieve full conformity for the benefit of

producers and consumers alike.

Alongside this positive conformity story, another optimis-

tic indicator going forward is global oil demand growth. It is

estimated to increase by close to 2m b/d from the first to the

second half of this year. This has been confirmed by the July

data. The US, in particular, is expected to be responsible for a

significant amount of this growth given the rising demand for

transportation fuels there during the summer driving season.

Undoubtedly this boost in demand will contribute to further

reductions in commercial oil inventories.

There is no doubt that the oil market is moving in the

right direction towards the objectives of the ‘Declaration of

Cooperation’. But patience andperseverance are still required.

As the Chinese philosopher, Confucius, once said: “The man

whomoves amountain begins by carrying away small stones.”

The rebalancing process was never going to happen over-

night; it was never going to happen in a linear fashion; and

it was always going to require a concerted effort by a wide

range of industry stakeholders. As the JMMC stated in the con-

clusion of its latest press release, all options, including the

possible extension of the ‘Declaration of Cooperation’ beyond

the first quarter of 2018, have been left open to ensure that

every effort is made to rebalance the market for the benefit

of all.