OPEC and its Russia-led non-OPEC allies are in their third year of managing supply to the market, hoping to draw down high inventories and push up oil prices.
Early this month, the so-called OPEC+ coalition of partners rolled over their production cuts of a combined 1.8 million bpd into March 2020, as the resurging oil glut threatened to derail their continued efforts to manage the market.
OPEC is now considering using several metrics to assess where global oil (over)supply stands, including taking the five-year average of oil stocks in 2010-2014 instead of the most recent five-year average 2014-2018, which it currently reports in its monthly oil market reports and which the International Energy Agency (IEA) also takes as a benchmark to measure oil inventories.
Analysts warn that the 2010-2014 average metric will not give a correct comprehensive assessment of the oil market.
Fatih Birol, the IEA’s executive director, warns that moving the goalposts doesn’t change the situation in the oil market. The glut is there, regardless of how OPEC wants to measure inventories.
“The important thing is that you can change the methodology but you cannot change the realities of the market,” Birol told Reuters, noting that the 2010-2014 average is a new perspective OPEC proposes to use, while the IEA has its own perspective.
On the sidelines of the OPEC+ meeting in Vienna earlier this month, Khalid al-Falih, the Energy Minister of OPEC’s largest producer and de facto leader Saudi Arabia, told Al Arabiya:
“With demand rising over the next nine months and the commitments from all the countries, including the Kingdom of Saudi Arabia, we are approaching the normal levels of supplies of 2010-2014. It is one of the options in front of us as a goal.”
“The rate of the last five years is another option, which we think is unsuitable. We will study the middle options between these two choices. In any case, we will make sure that the market is balanced with proportionate indicators,” al-Falih told the Arab broadcaster.
OPEC is set to use the 2010-2014 average as the main measure of oil market inventories, two sources told Reuters.
Analysts, however, are not convinced that this is the most sensible goalpost. First, the 2010-2014 doesn’t include the enormous glut from the end of 2015 through most of 2016, as estimated by the IEA and analysts at Bernstein, and compiled by Reuters.
Second, measuring against 2010-2014 could further distort the current market supply assessment because oil demand back then was around 7 million bpd lower than it is now, Energy Aspects co-founder Richard Mallinson told Reuters.
Giving too much weight to a single metric “could result in actions that have unintended consequences,” Mallinson said.
Third, the IEA and OPEC tend to measure oil inventories in the developed economies of the OECD countries, while stockpiles in countries like China and India, for example, are difficult to assess to the point of being nearly impossible.
Whatever the goalposts may be, OPEC continues to struggle with an oil glut, and the cartel itself and the IEA both warn that non-OPEC supply growth could add to the glut next year.
OPEC’s own estimates in the Monthly Oil Market Report in July show that total OECD commercial oil stocks in May rose by 41.5 million barrels to stand at 2.925 billion barrels, which was 25 million barrels above the latest five-year average, from 2014 to 2018.
So even considering the years of the biggest glut in 2015-2016, there is glut on the market.
Using 2010-2014 as a benchmark could result in much higher oversupply estimates, potentially building the case for OPEC to continue its market management policies after March 2020, when the current deal expires.
As things stand now, OPEC may have to extend the cuts yet again, if by March 2020 it’s still prioritizing ‘whatever it takes’ to cut global oversupply over fighting for market share and trying to sink U.S. shale.