Asian Crude Storage Trend Impacts OPEC Cuts

Andrew Cummings
June 13, 2017

During the first half of the year, there were doubts over OPEC's compliance with its own pledges, as supplies remained high. US crude inventories are forecast to have slid by 2.25 MMbbl last week, according to a Bloomberg survey before an EIA report Wednesday.

Brent crude oil was up 10 cents at $47.96 a barrel (bbl) by 6:30 a.m. CT (11:30 GMT), but still 12% below its opening level on May 25, when an OPEC promise to restrict production was extended into 2018.

The December 2017-December 2018 spread is now deeper into contango territory than at any point since the original OPEC deal back in late 2016.

As a result of this, Kachikwu disclosed that OPEC has commenced moves to engage with non-OPEC member groups led by the United States and some Latin American countries on the need to regulate shale oil production and stabilise crude oil supply globally. OECD commercial crude and petroleum products stocks declined for the second consecutive month in March, by 32.9 million barrels to 3.03 billion barrels, the International Energy Agency (IEA) estimated in its May report.

Meanwhile, U.S. drilling activity has continued apace, driving up U.S. output by more than 10 percent since mid-2016 to above 9.3 million bpd.

Nevertheless, increased output in the U.S. was getting in the way of the rebalancing process, OPEC complained. Inventories will settle to their five-year historical average - OPEC's target - before the end of the year, though Saudi Arabia, the group's biggest producer, may modify its policy if output cuts don't have the desired effect, he said. If realized, this increase would offset more than two thirds of the crude that OPEC and non-OPEC producers are clearing from the market-a sobering thought.

Oil rose on Monday to break a three-day losing streak, after futures traders increased their bets on a renewed price upswing even though rising USA drilling helped keep physical markets bloated. Crude oil futures have lost 15 percent of their value since February, raising the risk that unhedged companies are more exposed to market weakness. OPEC production in April, according to secondary sources, fell below its target level of 31.75 mb/d to 31.73 mb/d for the first time, achieving a compliance rate of 107 percent.

OPEC's battle against an oil glut is under threat as unsold crude from members Nigeria and Libya, which are exempt from a global production-cutting deal, is swamping the Atlantic Basin.

Libyan oil production hit its highest since October 2014 at 835,000 bpd this month, despite the brief shutdown of Sharara, the country's largest oilfield, due to protests. Sentiments in the financial markets of course swing like a pendulum.

Managing Director/Chief Executive Officer of Cowry Asset Management Limited, Mr. Johnson Chukwu, had indicated in a telephone interview that the market situation was also fuelled by the decision of the United States not to be part of the Paris Club on climate change.

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