OPEC Threatens to Prolong Glut by Protecting Asian Customers

OPEC's efforts to alleviate the global glut has again been called into question.

The degree to which the Organization of the Petroleum Exporting Countries (OPEC) is truly serious about alleviating the global glut was called into question yet again on Tuesday by Reuters, which warned that the cartel is attempting to shield Asia from its supply cuts, thus potentially prolonging excess inventory.

OPEC de facto leader Saudi Arabia is reportedly trying to maintain its market share by keeping its Asian customers supplied while targeting its output reduction at refiners in the U.S. and Europe.

Kuwait is taking a similar tactic, and OPEC member Iraq is boosting Asian exports; as for Russia, Reuters has studied export schedules signed off by that country and notes that it "plans to increase crude exports and transit across its territory by 200,000 barrels per day (bpd) in the first quarter of next year."

The strategy was exposed when refiners from Japan, China, and South Korea told Reuters they have not received reduction notices from most Middle East suppliers, except for slight restrictions from Abu Dhabi  – although Morgan Stanley in a note to clients on Monday stated that  "U.S. and European refiners are having January allocations cut from Saudi Arabia, Kuwait and the UAE (United Arab Emirates)."

The strategy seems to have been undertaken partly as a reaction to Asian refiners saying they would buy oil from alternative sources, including the U.S., if OPEC follows through with its reduction agreement: by shielding Asia, OPEC will supposedly compel U.S. producers to use more of their product to meet home-grown demand.

Eng Hian, head of trading at AgriTrade Energy, remarked, "It may take some time for crude supplies to tighten in Asia, which I expect around the second half of 2017, considering the existing supply overhang."

Protecting Asia will likely also have a big impact on price gains, considering China's stockpile build up from March to October has averaged 740,000 bpd for a total commercial stockpile of 239.8 million barrels in October, according to data from the General Administration of Customs and National Statistics Bureau.

This, combined with between 26 and 30 million barrels of crude or fuel oil contained in 20 supertankers just off Singapore and Malaysia's Johor state, caused Jonathan Chan, an analyst at Phillip Futures, to point out, "For prices to go up further decisively, these inventories will first have to be cleared out."

It's unclear what effect OPEC's strategy will have on long-haul trades such as the one performed by BP earlier this month: the company used one of the world's longest sea routes, seven tankers, and a series of ship-to-ship transfers to transfer almost 3 million barrels of U.S. crude to customers across Asia, in a bid for oil traders to develop new shipping routes to sell growing supplies of cheap U.S. product to the world's biggest consumers.