By Wael Mahdi*
Major oil producers — members of the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC — are meeting in Russia on July 24 to monitor their compliance to a deal aimed at curtailing production and rebalancing the oil market.
So far the agreement has not given enough assurance to the market that it will bring down global oil stocks by the end of the year, despite assurance from ministers that the deal is working.
The market has been hearing for too long from officials that oil stocks will fall down back to the five- year average “in theory” over the “coming six months,” whereas in reality stocks have been falling slowly and the amount of drawdowns may not lead to a balanced market by the end of the year.
In fact, this “coming six months” has been a moving target since November 2014 when OPEC first started to protect its market share in the face of rising output from non-OPEC producers, by letting oil prices fall and the market correct itself.
Now, will the “coming next six months” be any different than the first six months of 2017? Everyone is still hoping and all the calculations point to a rebalancing — but this was always the case since January.
Before understanding what happens over the next six months, it is important to examine what went wrong in the first six months.
So what really happened? There are many scenarios and explanations.
First, there is still lower conformity by OPEC and non-OPEC countries to their pledged cuts. Countries like Iraq, the UAE and Algeria are still not reaching 100 percent conformity levels since the beginning of the deal, according to estimates from OPEC’s secondary sources.
The data from the countries themselves under “direct communications,” present the same picture and the conformity levels are not evenly distributed among participants.
Second, some argue that high oil prices in the first quarter of this year encouraged more drilling and investments by oil companies and the effect of that was more rigs in the US and production rises here and there.
Third, there is too much light oil in the market and this is because of the increase in output from shale basins in the US and more recently the increased production from Libya and Nigeria. OPEC made the most of its cuts in medium and heavy grades while light crude is still advancing. The result is that the price of medium grades like Dubai is on the rise while the price of lighter crude like Brent and West Texas Intermediate (WTI) is falling.
Fourth, another explanation is that exports from OPEC countries and others are still high even if oil output is curtailed, and at the end of the day exports are what really counts and they are what go into stocks and not production.
Looking at the tanker tracking data from a very reputable source, it is clear that exports in June are no different than when the countries started the agreement in January.
OPEC’s crude exports in June averaged 25.19 million barrels per day (bpd), down by 200,000 bpd from 25.39 million in January. Examining the data further, exports in February and March were 25.82 million and 25.53 million bpd, respectively. These two months were higher than what OPEC exported in October last year when there was no agreement. The agreement does not put a cap on exports so there is nothing wrong if countries shipped more crude. Also, many OPEC countries sell to refiners under term contracts and so are not traded in the spot market.
So some argue that such production goes to final users and not storage. However, high exports mean that consumers do not need to resort to stored oil to meet local demand, therefore, stocks do not reduce quickly.
In fact, the OPEC deal was under pressure in the first quarter of this year because OPEC countries shipped or produced a record amount of crude in last quarter of last year.
It takes around 45-55 days for any crude shipments from the Middle East to reach refiners in Asia or North America, so what was shipped in the final quarter of 2016 must have led to high stocks in the first quarter of 2017.
So in the light of all of this, what would OPEC and non-OPEC allies suggest to fix the situation when they meet in Russia? The best thing to do is to find a way to monitor exports instead of production, and the second best thing to do is for everyone to be honest about fixing the situation in the market and not leaving it to others.
Otherwise, the next six months will be little different to the first.
• Wael Mahdi is an energy reporter specializing on OPEC and a co-author of “OPEC in a Shale Oil World: Where to Next?” He can be reached on Twitter @waelmahdi
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