OPEC Cuts Appear To Be Working

Finally!  Over the past few weeks we have started seeing some inventory draws as reported by the EIA in its weekly assessment of U.S. Inventories.  And that is good news indeed.  Because many people, the author included, were beginning to doubt the veracity of the OPEC output cuts.

But despite the resurgence of U.S. Shale, everything appears to be on track with oil markets rebalancing.  First, OPEC reported in its last monthly report that production had dropped 152,700 barrels per day, to 31.9 million b/d last month.  These were led by declines from Libya, Nigeria, Iran, and UAE.  According to OPEC, demand for their product is estimated to be 32.2 mmbd in 2017, suggesting that they are producing under current demand (or at least, close to it).

And these numbers support OPEC’s compliance.  But inventories don’t seem to be clearing and, can we really trust OPEC, when OPEC members don’t even trust each other and typically compile their own data from “secondary” sources?

Well, the answer is yes.  We seem to be getting more and more news that global inventories are indeed rebalancing.  You may remember that we talked about indicators of market rebalance.  As we discussed in the prior segment this week, the U.S. reports (API and EIA) are but two of the indicators of worldwide production, supply, and storage.  In terms of storage, both focus on storage with in the US.

But we have other indicators as well – they just get a little more difficult and ambiguous to track.  You may remember that in a prior Edition, we discussed the great lengths people used to go to in order to track shipping.  Now, that process is much more automated.  But every trader still looks for advantages and a cottage industry surrounds ship tracking.  According to the Financial Times, data suggests that crude oil being shipped over the oceans or currently stored on supertankers has dropped by as much as 16% since the beginning of the year.

According to the Financial Times, who is relying on Vortexa, a company which specializes in tracking oil shipments , the data shows that on April 3, 2017, oil in transit over the world’s oceans from producers to refineries or storage farms totaled 759.6 million barrels of crude, with an additional 52 million barrels still being held at sea on supertankers.

In contrast, on January 01, 2017, there was an estimated 899.4 million barrels in transit and 78.4 million barrels held in floating storage.  The combined total on April 3 is down 17% from a year ago, suggesting an actual supply drop.

Additional data seems to support the effect of OPEC cuts.  On April 6, 2017, Reuters released an article stating that Iran has been struggling to grow exports and facing more and more production constraints.  Specifically and notably, Iran has now sold off all of its oil in floating storage.  For years, Iran kept pumping oil and storing it in tankers, presumptively with the hopes that if sanctions were ever lifted they could immediately receive a cash infusion.  Prior to the lifting of sanctions, Iran had around 40 million barrels in 25 tankers.  The country has 60 tankers in its fleet.  Iran began drawing down its floating storage in September of last year.  At the beginning of 2017, Iran still had an estimated 16 million barrels of oil in storage.  They are now empty.

Another key indication that markets are rebalancing lies in the Caribbean.  Low taxes and a proximity to the U.S. and Latin American oil centers have made Caribbean nations leaders in world oil storage, holding as much as 140 million barrels.  According to an article published by Bloomberg on April 3, 2017, since mid-February, between 10 and 20 million barrels have left their Caribbean homes.  And according to at least once source, that draw down accelerated substantially in March.

While these indicators may seem minor in the 98 million barrel a day oil market, put into context, they may be significant given the lack of transparency in most countries as we discussed in the prior article.  All told, oil markets appear to be reaching balance.

By: Ty Chapman
Five Star Metals, Inc.

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