OPEC Admits Global Oil Stocks Are Still Rising But Insists the Outcome of its Cutbacks Will Be Favourable

One analyst believes fundamentals dictate that oil will remain in the $40s.

The Organization of the Petroleum Exporting Countries (OPEC), which accompanied its two-month old oil cutback initiative by declaring repeatedly that its efforts would either help bring about market stability or come closer to it, now says in its latest monthly report that global oil inventories have risen dramatically.

The report reveals that stocks in industrialized nations rose in January to 278 million barrels above the five-year average: of this surplus, 209 million barrels is crude and the rest are refined products.

OPEC stated, "Despite the supply adjustment, stocks have continued to rise, not just in the U.S., but also in Europe."

This is despite a cutback compliance rate that now stands at over 100 percent, with supply from the 11 members under the accord falling to 29.681 million barrels per day (bpd) in February.

Secondary sources that contributed to the OPEC report report higher than estimated production increases in Algeria, Iraq, the United Arab Emirates, and Venezuela; this is coupled with OPEC forecasting that production from non-member nations this year will rise by 400,000 bpd, 160,000 more than previously calculated (also, U.S. output in 2017 is expected to increase more than earlier thought, by 100,000 bpd).

OPEC tried to put a positive spin on the troubling numbers by noting that "Nevertheless, prices have undoubtedly been provided a floor by the production accords."

But the fundamentals continue to worry analysts such as Todd Colvin, senior vice president of Ambrosino Brothers, who told Bloomberg, "obviously now supply is going to become more of an issue, and the mid-$40s is probably where we're going to sit until the next catalyst comes."

Colvin added that whether that catalyst "is an increase in U.S. demand or an increase in global demand has yet to be seen, and that's why we're starting to see this decline in oil"; he also wondered if the U.S. shale recovery can be sustained now that crude prices are no longer in the $50s.

Still, OPEC is sticking to its guns by insisting that its cutbacks will cause stockpiles to fall, and that in the second half of this year "the market is expected to start balancing or even see the start of a drawdown in oil inventories."

To complete the upbeat picture, OPEC has upwardly revised its forecast for world demand this year to $32.35 million bpd for its crude, which would indeed absorb current production, assuming the numbers don't climb further.

Apparently not every OPEC member is impressed with the cutback achievements the cartel has made thus far: earlier this week Issam Almarzooq, oil minister for Kuwait, called for an extension of the reduction agreement, saying it is necessary to ''accelerate the rebalancing of the global oil market and...contribute to the return of prices to levels acceptable for producing countries and for the petroleum industry in general."