OPEC+ Conveys Meaningful Indication About Global Recovery – Analysis


By Michael Rothman*

OPEC+’s decision last week (in near-record time) to maintain the quota roll-down was largely expected, and there were no wrinkles to speak of.

The indication that global oil demand is still on the upswing was the key background factor and afforded members a high degree of confidence about adding back barrels each month through the end of the year.

It was evident the quota unwind was still not viewed as an “automatic” should the demand recovery take a turn for the worse, which speaks to OPEC+’s resolve to further tighten the supply/demand balance with the aim of elevating oil income.

As to data about the here and now, we estimate that total petroleum inventories in the Organisation for Economic Co-operation and Development’s North America and Pacific regions saw a collective draw last month. The two regions account for two-thirds of global inventories. The estimate we published for clients is larger than forecast and represents a meaningful swing from a normal; August typically sees a stock build.

Importantly, it compares with the consensus projection for storage in these two regions to have risen by more than 25 million barrels last month. While we are waiting on some additional data to round out the picture, our estimated inventory figure suggests global oil demand ran stronger than forecast. This was also the case for July.

All supply and demand factors intersect at storage. This fact serves as the literal cornerstone for all oil price/oil inventory assessments. One proprietary model we developed about 20 years ago equates Brent crude prices as a function of total OECD petroleum stocks (this encompasses crude oil, all refined products, petrochemicals and biofuels).

A model we developed a couple of years ago uses OECD crude stocks only as the independent variable. Its explanatory power is a little stronger than our original model, which may reflect the fact that more market players can get a sense of that dataset.

A few weeks ago, we developed a third iteration, which models monthly Brent crude prices as a function of crude stocks in the North America and Pacific regions only. It is built off the same storage/price relationship, and it has an impressively high explanatory power for a single variable model. The advantage of this third iteration relates to the fact that we can generate weekly crude inventory estimates. Based on our recent estimate for Pacific and North America crude stocks, the model kicks out a “fair value” for Brent crude of $85.50 per barrel, which is $13 per barrel higher than last week’s closing price.

As a final discussion point for this week’s column, we will note that Afghanistan is inconsequential when it comes to global oil supply or demand. It produces no oil, and its consumption is less than 40,000 barrels per day, which is a literal rounding error in the global balance.

Its location, however, affords access to key oil exporters lining the Arabian Gulf. The tumult of late tied to the US administration’s decision to exit the country is occupying a significant amount of casual press coverage, which is understandable, but it has been a nonfactor for the oil market. The concern we have relates to havens being established for radicalized militias that have antagonistic agendas to oil-exporting nations in the region.

As the global oil market tightens over the medium term, which is our forecast, any and all supply risks can start to take on increased importance to market players.

• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986.

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