In spite of all the short term noise due to hedge fund trading: in the end it are supply and demand that determine the price of oil. Reliable estimates of oil stocks are essential to determine where supply and demand are going.
And here we face a dilemma. The oil market is a global market. But accurate and up-to-date estimates of oil inventories are only available for the US. After the first oil crisis the US government established the EIA and its weekly reports are closely watched by traders across the world. The IEA reports for other OECD countries are published on a monthly basis and are less accurate. Even less accurate are the estimates for non-OECD countries (countries that often regard these data as confidential).
But what is the relation between US inventories and global inventories? It seems the extent to which US inventories are representative for global inventories has been diminishing over the years.
Rising US oil stocks
Over the last few weeks the EIA has reported relatively small drops for US oil inventories. At this moment these inventories are still at record levels, close to 530 million barrels (about 30 million barrels higher than last year at this time of the year). As a result, WTI has difficulties staying above 50 dollars per barrel – especially during the last few weeks.
How to reconcile the high OPEC compliance to the agreed cuts with these record high levels of US inventories?
Falling global oil stocks
Oil traders are increasingly looking at recent start-ups that, using satellite tracking of tankers,
are trying to get a better picture of worldwide oil inventories and transports. On the basis of data from one of these companies (Vortexa), the Financial Times reported that the total amount of oil in supertankers (both stored and in transport) had diminished by 16 percent since the beginning of the year.
According to Bloomberg, oil stocks in the Caribbean have diminished by about 10 percent since February. The picture that emerges is one where oil from poorly (or not at all) reported stocks in producing countries, supertankers and from more remote locations (Caribbean, South Africa) has now started to move to major refinery centers (where they are accurately reported).
OPEC production cuts
It seems the OPEC cuts are now starting to influence global oil stocks. Influencing the most visible and accurate US stocks (which have the largest bearing on oil prices) takes longer.
Within OPEC, compliance to the agreed cuts has reached levels close to 100 %. For the non-OPEC countries contributing, compliance has reached about 60 -70 %. Even Russia is sticking to the deal (not that much of an achievement given that Russian production tends to fall at the end of the winter).
As a result the IEA now expects global supply to fall below demand by about 1 mb/d in Q2 (assuming a continuation of the current measures).
OPEC will continue its current cuts
In my view the high US stocks have been masking falling global stocks. Large US storage facilities are efficient and low cost (and not the first locations where one takes oil out of storage). Non-OPEC supply outside the US is now falling, whereas US supply is rising.
The following appears to be the most probable scenario for the coming time:
- OPEC continues its current cuts on the next meeting on May 25th. Stopping now implies not only a severe oil price drop (something they can ill afford) but also a lasting loss of influence and credibility. One day Saudi Arabia (the country bearing the largest burden) will no longer be able to bear the free riding of countries like Russia but that moment has not been reached yet.
- The transition from oversupply to undersupply will gradually become more clear and will eventually result in falling US oil stocks as well.
- Which opens the door to a gradual and limited rise in oil prices (the average expectation of a large number of experts: 60 dollar in 2018; 70 dollar in 2020). It will be a difficult and tortuous road.
From every nook and cranny oil is now coming out of storage. That implies that rebalancing of the oil market takes longer. But it does not imply that it will not happen.