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Opec discipline so far not sufficient to slash bulging world stocks

Mar 10. 2017
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THE DRAMATIC discipline shown by oil producers in adhering to the landmark production-cut deal reached late last year has no doubt taken the world market by surprise, but it has done little to make a dent in supply, prompting prices to hover in a tight range of US$50-$55 a barrel.

And with the refinery maintenance season looming, it is unlikely that international oil prices will break above $55 a barrel in the near term.

According to a survey by S&P Global Platts, out of a total refining capacity of around 32 million barrels a day in the Asia-Pacific region, about 2.9mmbd is expected to be shut down from this month to June, reducing demand for crude oil. The 10 members of the Organisation of the Petroleum Exporting Countries obligated to reduce output have achieved 98.5 per cent of their combined cuts over January and February, Platts’ latest Opec output survey showed.

Saudi Arabia, the strongest proponent of the output-cut deal, has shown immense discipline by cutting production to well below its allocation of 10.06mmbd. February was the second consecutive month that Saudi Arabia produced under-produced, at 9.85mmbd.

In comparison, Iraq remains 91,000 barrels a day above its quota despite lowering its February output, Venezuela is 43,000b/d above, and the United Arab Emirates is 42,000b/d above. This poses a key risk to the agreement. 

Though the Saudis appear comfortable leading the way for now, for how long will they be willing to concede revenue and market share to arch-rival Iraq?

Under the November 2016 agreement, Opec pledged to cut 1.2mmbd for six months and freeze production at around 32.5mmbd. In concert with Opec, 11 non-Opec countries led by Russia have also agreed to cut output by 558,000b/d in the first half of 2017.

Libya and Nigeria are exempt from the production-cut agreement and Iran was allowed to boost production to 3.80mmbd as it recovers from Western sanctions lifted in January 2016. 

Among the non-Opec producers, Russia has cut production by 120,000b/d, and overall non-Opec compliance has been pegged at around 50 per cent by Qatari Oil Minister Mohammed Al Sada.

Rising stocks

But the production cut is yet to lead to a reduction in stocks.

The latest data from the US Energy Information Administration (EIA) showed that commercial crude-oil stocks there had reached fresh record highs of 520.2 million barrels. The International Energy Agency (IEA) in its February monthly report said OECD (Organisation for Economic Cooperation and Development) stocks had come off the 3-billion-barrel mark but wre still 286 million barrels above the five-year average.

Add to this rising US production and it is no surprise that the November agreement has not been able to push prices significantly higher.

According to the EIA, oil production in the US has reached 9mmbd, up from a trough of 8.4mmbd in the week ending July 1, and if the pace at which rigs are being added to onshore and offshore leases is anything to go by, expectations of further growth are widespread.

Platts RigData, a forecasting and analytics unit of S&P Global Platts, on March 6 announced that the US rig count for February was 834, up 61 or 8 per cent from January, and up 245 or 42 per cent from February 2016.

In its five-year outlook released on March 6, the Paris-based IEA said it expected US light, tight oil production to rebound by 1.4mmbd over the next five years supported by firmer oil prices and “enormous” cost savings and efficiency improvements in the sector.

Saudi strategy

While Saudi Arabia may be leading the way on production cuts, it is certainly not moving away from its strategy to fight for market share.

The kingdom sent 5.03 million tonnes (36.87 million barrels) of crude-oil shipments to China in January, up 18.8 per cent year on year and up 40.7 per cent from December, and replaced Russia as China’s top supplier in the month.

Its supply to Japan rose 9 per cent year on year to 1.44mmbd in February – the highest level for the month since 1981.

The Saudis also pleasantly surprised Asian crude-oil buyers by bigger-than-expected cuts in their |official selling price for crude loading in April in an effort to stave off |barrels from far-off suppliers |heading into Asia.

For the longer term, the kingdom has stepped up state-to-state activity aimed at securing new long-term oil-supply deals.

State-run Saudi Aramco this month signed a $7-billion (Bt247 billion) deal to acquire 50 per cent of Malaysia’s Refinery and Petrochemical Integrated Development (RAPID). As part of the agreement, Aramco will deliver 70 per cent of the crude oil for the refinery. Aramco has a similar agreement with Indonesia’s state-run Pertamina.

While leading Opec and non-Opec producers keep production under check, the current price levels are attractive enough for US producers to step in to fill the vacuum. In the absence of a strong anticipated rise in world oil demand, expecting prices to rise sharply is like hoping against hope.

Mriganka Jaipuriyar is associate editorial director of Asia and Middle East oil news and analysis at S&P Global Platts.


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