"Bargain hunting" China May Slow Glut Reduction If OPEC Cutbacks Boost Prices Further: ClipperData

by Ship & Bunker News Team
Wednesday December 28, 2016

If the Organization of the Petroleum Exporting Countries' (OPEC) oil cutback plan plays out as expected and further boosts prices, ClipperData warns that this could result in less strategic buying from China – which in turn would impact OPEC's stated goal of reducing the global glut.

Matt Smith, head of commodities research at ClipperData, told CNBC's Squawk Box that China, which is embarking on its own cutbacks in order to reduce stockpiles that have grown dramatically in over two years of weak prices, has in 2016 proven to be a "really strong" source of emerging market demand.

But he added, "they've been on these sort of bouts of bargain hunting and opportunistic purchases to essentially fill their stockpiles, their strategic reserves; and so, as prices rise, and as they've risen recently [on the order about 20 percent since the cutback deal was ratified], we're likely to see less of that bargain hunting next year."

Analysts in November noted that China's huge appetite for oil gives it the power to dictate prices, at a time when producers are trying to offset low prices by attracting more business – and that in 2016 it has used its influence to pit producers against each other in a race to the bottom, as evidenced by shipments to China from Saudi Arabia, Iraq, and Iran.

China joins the U.S. in the list of countries that could potentially ruin the effect of the cutbacks, and Ed Morse, head of commodities research at Citigroup, suggests more attention should be paid to the prospect of an American shale rebound: he told Bloomberg, "OPEC is aiming for a much-needed lift to the oil price, given the stretched fiscal balance sheets of every producing nation, [but] the question really should be what happens afterwards: how fast is U.S. shale going to come back?"

If Baker Hughes Inc. and U.S. Energy Information Administration data is anything to go by, the answer is very fast: with just one third of the rigs it operated at peak, the U.S. is already pumping almost as much crude as two years ago, at 8.8 million barrels per day; and since May, drillers have added 200 rigs to take advantage of the rising prices expected by the OPEC reductions.

For his part, Mike Wittner, head of commodities research at Societe Generale SA, doesn't think the U.S. rebound will happen as fast as some  believe: "It's going to take them a while to gear up: the investment's got to gather pace, the drillers and the fracking contractors also need time.

"It's a gradual process."

Capping the debate is Bloomberg, which thinks the biggest threat to OPEC's cutbacks could be members Nigeria and Libya, both exempt from the deal: "If each nation reached its [production] potential next year, then their additional barrels would almost wipe out the producer group's supply cuts."

The question of  how high prices could rise has produced as many predictions as those about ways the cutback deal may be sabotaged: last week, Khalid Al-Falih, energy minister for Saudi Arabia, weighed in with his opinion, stating that crude will increase "tangibly" next year and fall somewhere between $50 and $100 per barrel in coming years.