OPEC Faces Surprise Outcome After Oil Cuts: Higher Stockpiles

by Grant Smith

When OPEC and Russia meet next month to assess the impact of their oil cuts they face a surprising outcome: stockpiles are even higher than when they started.

Inventories have started to decline, but by the time ministers gather in Vienna on May 25, developed nations still won’t have burned through the big stockpile increase caused by a surge in OPEC output just before the cuts came into force, data from the International Energy Agency indicate.

The Organization of Petroleum Exporting Countries has been “hoisted by its own petard” by agreeing in principle to reduce production last September while allowing members to keep boosting sales until the deal took effect on Jan. 1, Citigroup Inc. said. While the group has fully implemented its pledged cuts, that’s being offset by U.S. shale oil producers buoyed by price gains, according to Commerzbank AG.

 “OPEC is like a magician waving his hands and trying to pull the rabbit out the hat, but still the rabbit isn’t there,” said Eugen Weinberg, Commerzbank’s head of commodities research in Frankfurt. “They’ve done all they can with the production cuts and the effect is close to non-existent.”

The accord last year between OPEC, Russia and 10 other producers was intended to boost prices by eliminating an inventory surplus to the five-year average of about 300 million barrels — equivalent to three days of global oil production. By this measure, the historic agreement hasn’t delivered.

Persistent Surplus

At the end of December commercial oil stockpiles in the 35-nation Organization for Economic Cooperation and Development totaled 2.98 billion barrels, according to the Paris-based IEA, which advises those countries on energy policy. That rose to 3.06 billion barrels in January due to a late surge in OPEC shipments before the cuts came into force.

“Producers unintentionally accelerated activities that would ultimately obstruct, and for a period reverse, the very rebalancing they were trying to accelerate,” said Ed Morse, head of commodities research at Citigroup.

Inventories in the OECD — which consumes about half global supply — fell only slightly in February and remained 330 million barrels above the five-year average, bigger than the surplus of 286 million at the end of December, IEA data show.

Bloomberg calculations using the agency’s supply and demand projections indicate that, by the time OPEC’s accord expires in June, stockpiles will be roughly back in line with their end-December level and still about 200 million barrels above the five-year average. That would leave the group, which must decide in May whether to extend its pact for another six months, well short of its goal.

Bottom of Form

That picture could change in the coming weeks, said Paul Horsnell, head of commodities research at Standard Chartered Plc in London. Data for the first quarter aren’t detailed enough yet to make solid conclusions, and inventories in more obscure locations may be falling more rapidly than it appears, he said. Some major oil consumers, notably China and India, do not publish monthly inventory levels.

Even if current data are correct, Citigroup, Standard Chartered and many other analysts aren’t declaring the cuts a failure. Instead they predict that OPEC and Russia will extend their pact for another six months, giving time to fulfill their goal.

“I believe OPEC will continue its policy of restraining production,” said Paolo Scaroni, former chief executive officer of Italian oil major Eni SpA and current vice chairman of NM Rothschild & Sons Ltd. “There is not the kind of oil glut that we had only 12 months ago” and the agreement is on track, he said.

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