Vitol Says Oil Market "Solid' but Platts Suspects It's Overtightened

Although the head of Vitol believes the crude market is doing "absolutely fine" and fundamentals suggest that prices could climb even higher than recent highs, S&P Global Platts Analytics is worried that the market may in fact become overly tight in coming months.

Platts argues that although the Organization of the Petroleum Exporting Countries (OPEC) has declared it won't abandon its production cuts that many credit for helping bring about a market rebalance, global inventory levels may be far less bloated than the cartel thinks - and this may lead to OPEC overshooting "on tightening the market, which could exacerbate the backwardation in prices, prolong the rally in near-term prices, and ultimately erode demand."

Platts cited independent analyst Anas al-Hajji as theorizing that "Even the US Energy Information Administration's report Wednesday that US crude production reached 10.04 million b/d in November, the highest in 47 years, could be masking tightness in some parts of the market."

That's because much of US production has been in light or ultralight sweet crudes, while the majority of OPEC's production cuts have come from heavier, sourer grades; and each cater to different markets.

Hajji said, "There is a case to be made that the market is even tighter than [supposed] if the portion of [light/sweet crude] inventories.....has increased in recent years and months."

For the record, OPEC has pegged OECD oil inventories at 133 million barrels above the five-year average.

But Vitol doesn't share Platts' concerns: CEO Ian Taylor told Bloomberg television that "I think the markets have done remarkably well: the run-up has been much stronger than we and most of the industry thought [due to] the weak dollar, good performance from OPEC, not fantastic performance yet from U.S. crude - all sorts of things."

He went on to note that despite the current pullback, "Overall I think we're slightly more bullish," and he added that the oil fundamental his company focuses on "are absolutely fine....perhaps demand in China is not quite as rampant as we thought, but it's going to come; so in general, for oil, we are very solid."

Taylor credited American energy companies for beginning to show "a lot more capital discipline...and I think they will continue to be really focused on creating cash flow" and growing in a disciplined way over the next decade.

He concluded that given all these factors, "I wouldn't be surprised to see the market edging into the low $70s."

Taylor conceded at least that prices wouldn't reach the $80 level recently forecast by Goldman Sachs and pushed by Bloomberg as sustainable, at a time when a growing number of experts were arguing that crude prices had been oversold and were a bubble waiting to burst.