Global Drawdowns Embolden OPEC and Analysts, but Experts Warn That It May Merely Be a Shifting of Supplies

Goldman sees a return to long-term oil price stability.

The Organization of the Petroleum Exporting Countries' (OPEC) three-month old initiative to slash production and reduce the global glut is finally starting to pay off, according to myriad data and a new assessment from Energy Aspects - but other experts warn against confusing the efficacy of the highly-criticized cutbacks with normal seasonal market adjustments.

Richard Mallinson, analyst for Energy Aspects, told Reuters, "Across the first quarter of the year, crude stocks built by much less than they did in the first quarter of last year, even though refinery maintenance globally was much heavier."

In the wake of news that Iran has sold all of its stored oil and is struggling to maintain exports, oil traders now say Vitol has sold millions of barrels of stored Nigerian crude, and that Total and Mercuria is offering oil from storage as well (a further 2 million barrels for the former).

SEB calculates that global oil inventories in weekly data have dropped by 42 million barrels in the last four weeks, and FGE says that total main product stocks levels in the U.S., Amsterdam-Rotterdam-Antwerp independent storage, and Singapore and Japan have declined by 6.5 million barrels in the week to March 13.

As far as Abhishek Deshpande, chief energy analyst at Natixis, is concerned, OPEC's strategy is working: he told Bloomberg television, "The problem is, markets are hawk-eyed on U.S. data and U.S. inventories and they're missing the big picture here, which is the stock drawdowns in the rest of the world."

He added, "I think that focus will move very quickly as data for March-April turn out to show that the markets have reacted to the OPEC and non-OPEC cuts...the market is rebalancing and demand is quite robust."

Not surprisingly, this is also the view of OPEC, which in its latest monthly report has upgraded its world oil demand forecast to 1.27 million barrels per day (bpd), an upwards revision of 10,000 bpd and a reflection of improved momentum in global economic growth.

According to the report, Asia, including India, is expected to lead demand growth, followed by China and the U.S; Asia-Pacific is the only region expected to see a decline 2017, and total oil consumption this year is expected to stand at 96.32 million bpd.

But with regards to the current perception that crude stocks are falling world-wide, Hamza Khan, head of commodities strategy with ING, said normal seasonal draws on oil products at the end of refinery maintenance season could be creating an illusion of a tight market: "The key question is whether it's being consumed or whether it's pushed into somewhere else."

FGE too cautioned that much of the current data is related to maintenance shutdowns.

As if to cap any debate about the relevance of the figures, Goldman Sachs anticipates a return to long-term price stability with price fluctuations in the realm of 10-20 percent, plus a long-term West Texas Intermediate price of $50 per barrel, slightly lower than its previous $54 per barrel estimate.

However, this outlook is not based on reports of falling stocks, but on improvements in technology and therefore the costs involved with U.S. shale extraction: "This higher level of certainty in the resource base for future supply is what helps drive our confidence."

The bank went on to note, "The last time the market had this level of certainty around long-term oil prices was before the rise in long-dated oil prices in 2003, nearly 15 years ago."

Last week in the wake of reports that Iran had sold all of its stored crude, Mallinson theorized that it is almost inevitable that exports will now decline: "We do think that (floating storage) has been the primary cause of the boost in exports; we see a very difficult path for Iran to raise crude output until it can get the Western expertise and investment back into the upstream, which has been notably slow to materialize."