Global Oil Market’s Surplus Not Sufficient for OPEC

Goalpost was shifted by OPEC in assessing an overhang in oil inventories, giving the group more room to extend production cuts.

Meanwhile, the move will offer a distorted view of market conditions as analysts warned.

The start of curbing oil output was two and a half years ago by the Organization of the Petroleum Exporting Countries and partners such as Russia, a group known to be OPEC+.

Bringing of oil storage in the industrialized world in line with the five-year average was their target.

In OPEC’s view, removing the excess in inventories would reach balanced oil market.

Earlier this month, Saudi Energy Minister Khalid al-Falih indicated OPEC was consuming period 2010-2014 as one metric to measure the success of its oil cuts.

This new metric serves as a shift away from the more recent five-year average of 2014-2018. The International Energy Agency, and OPEC itself, had used this measure to measure market conditions.

Referring to when the supply curbs end in March 2020, Falih said, “2010-2014 is probably another end of the spectrum.”

He also further stated, “We will be looking at a collection of metrics that would give us guidance on what to do next after the nine months are over.”

Future Demand for Stocks

In September, the next meeting of the OPEC+ ministerial monitoring committee would focus at stocks in terms of cover for future demand.

They will also discuss how much of those stocks was in pipelines and tank heels referring to oil residue under a tank’s suction pump.   

The years 2010-2014 would be the primary metric for measuring inventories, two OPEC sources indicated.

They said the basis was the 2010-2014 average through 2015-2016 when inventories increased at record levels.

When OPEC was also led by Saudi Arabia, it has boosted output in a fight for market share against shale and other producers.

In a news report, IEA Chief Fatih Birol said, “This is a new perspective suggested by OPEC. We have our own perspective.”

He also added, “The important thing is that you can change the methodology, but you cannot change the realities of the market.”

Updates on Stock Figures with OPEC

According to the recent monthly report of IEA, the Organization for Economic Co-operation and Development, stocks were 220 million barrels in May, above the five-year average in 2010-2014.

In contrast, the projection in May above the five-year average of 2014-2018 stood at only 6.7 million barrels, the IEA said.

OPEC’s own figures suggest the May surplus was at 25 million barrels above the 2014-2018 average.

One of the OPEC sources said, “It’s basically telling everyone we will continue oil supply management for a while.”

Richard Mallinson, a co-founder of Energy Aspects, said, “Examining the 2010-14 five-year average will encourage OPEC+ to maintain supply restraint to rebalance the market.”

He also added, “But putting too much focus on a single metric could result in actions that have unintended consequences.”

Mallinson indicated that looking at the 2010-2014 metric has its shortcomings. But global oil demand grew from 93 million barrels per day in 2014 to 100 million bpd this year.