Taking stock

OPEC Bulletin Commentary August-September 2017

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 performed 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 contributing 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 for maintenance in the US alone, which equated to approximately 60m b.

It is also important to remember that the fourth quarter of 2016 was a period of significantly rising supplies that were working their way through the market in the early part of 2017. From September to November 2016, non-OPEC production increased by around 1.8m b/d, while OPEC production 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 commercial 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 following 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, industry 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 producing 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-OPEC producing countries, in accordance with 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 participating 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 satisfaction with the results achieved so far and with the steady progress made towards full conformity. At the same time, however, 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 optimistic 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 and perseverance are still required. As the Chinese philosopher, Confucius, once said: “The man who moves a mountain begins by carrying away small stones.”

The rebalancing process was never going to happen overnight; 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 conclusion 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.

OPEC Bulletin August-September 2017

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