It's the shipping, stupid: why Opec's output cuts are not working

Posted June 15, 2017

Reports of an increase in OPEC's output by 335,000 barrels per day (bpd), due to increases by Nigeria and Libya, both of which are exempt from production cuts is invalidating the efforts of Saudi Arabia to balance the markets.

OPEC's own compliance with the cuts has been questioned, and the producer group said in a report this week that its output rose by 336,000 bpd in May to 32.14 million bpd.

Crude inventories fell by 1.7 million barrels in the week to June 9, compared with analysts' expectations for an decrease of 2.7 million barrels. Inventories were 292 million barrels higher than the average over the past five years, said the agency, which advises governments on energy trends. "But then, we saw several pullbacks", said Michael Tran, director of global energy strategy at RBC Capital Markets.

USA shale production will surge to a record in July, the EIA projects. New supplies from OPEC's competitors will be more than enough to meet growth in demand next year, the IEA said in a report Wednesday.

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Last month, Iran exported about 1.1 million bpd to Europe including Turkey, nearly reaching pre-sanction levels and only slightly below the 1.2 million bpd supplied to Asia, the source said.

Brent crude oil fell by 28 cents to $48.44 a barrel by 1330 GMT, while US crude futures were down 29 cents on the day at $46.17.

It is the sort of situation that is unlikely to persist, with the Saudis likely to demand more compliance from Opec and the 11 allied producers, including Russian Federation. "OPEC will therefore have to cut production further next year to ensure that the oil market is not oversupplied".

The IEA, a Paris-based body that advises oil-consuming states on energy matters, said in its monthly oil report it expects production in non-OPEC states like the grow 700,000 barrels daily this year.

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The surge in oil production also stems from some OPEC members failing to meet production targets.

Under the deal to support the market, OPEC is curbing output by about 1.2 million bbl/d and Russian Federation and other non-OPEC producers are cutting by half as much.

OPEC and non-OPEC countries made a decision to extend oil output cuts for nine months in Vienna on May 25.

"We have regularly counselled that patience is required on the part of those looking for the rebalancing of the oil market, and new data leads us to repeat the message", the IEA said.

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Some traders still hope that Wednesday's readings from the US government will show declining inventories for oil and gasoline, as numbers from the Energy Information Administration don't always match those from the API.