It’s been said that you can never have too much of a good thing. But members of the Organization of the Petroleum Exporting Countries (OPEC), faced with the oversupply of crude, might take issue with that statement.
This glut continues in spite of the group’s strategic agreement at the end of last year to cut their combined oil production by more than a million barrels per day (bpd) in the first six months of 2017. Eleven other exporters—Russia included—also put on the brakes to the tune of 558,000 bpd.
But before the agreement went into effect, members of the cartel, in anticipation of the impending and promised slowdown, ramped up production. Between September and November, output surged by more than 500,000 barrels per day. In an article in fuelfix.com, Matt Smith, Director of Commodity Research at ClipperData, writes that during that period, countries soon-to-be-bound by the agreement “exported as much as they possibly could. Hence, all of the cartel’s efforts in the first half of this year are being spent unwinding the impact of that exuberance.”
Around the world and on our own Gulf Coast, traffic jams of tankers waiting to be loaded or delivered provide dramatic proof of ports still struggling to handle record oil volumes. In mid-April, after reaching its lowest point since last September, crude waiting offshore in the U.S. Gulf started to rise—up over 9 million barrels—in the ten days that followed.
Will OPEC’s cuts be effective?
At this point, it’s hard to say, namely because of conflicting data when it comes to the availability of oil. If OPEC and its allies are to achieve their goal of sustainable higher prices, there needs to be a reduction not only in production, but also in available inventory. And this is where things don’t quite add up.
For instance, customs data released this April showed that China, the world’s largest crude importer, actually posted an increase in oil imports from Saudi Arabia, Russia, Angola, Iran, and Iraq in March over what it had received the previous month.
So, if production is down, as OPEC claims, why are China’s oil imports up? There is, apparently, a big difference between reducing output and actually cutting supplies. In other words, even though OPEC and its allies seem to be complying with the cuts they agreed on, they still have supplies of crude available to ship. And they’re shipping it.
The bottom line, according to Reuters analyst, Clyde 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.”
To renew or not to renew?
At the end of May, OPEC will decide whether to renew the 6-month agreement to cut production. Most analysts believe that renewal is a foregone conclusion. However, there is debate as to whether continued curbs on production will have the desired effect for OPEC of stabilizing—if not raising—the price of their crude.
Weighing in on the topic, the International Energy Agency (IEA) recommends a wait-and-see approach for those looking for a re-balancing of the oil market: “The market needs time for the full impact of the big supply cuts under the output reduction agreements to be felt.”