OPEC Still Pushing for Oil Deal Extension in 2019 Even as Prices Rise and Glut Clears

Thursday April 12, 2018

Citing for the umpteenth time the efficacy of its production cuts as well as robust demand, the Organization of the Petroleum Exporting Countries (OPEC) stated in its latest monthly report that the global oil stocks surplus is close to vanishing.

OPEC noted that oil stocks in the developed world reversed a rise in January to fall by 17.4 million barrels in February to 2.854 billion barrels - around 43 million barrels above the latest five-year average; stock levels are now 207 million barrels below their level of February 2017, with crude stocks in a surplus of 55 million barrels and product stocks in a deficit of 12 million.

This caused Mohammad Barkindo, secretary general for the cartel, to remark in New Delhi that “We have achieved an over 150 percent conformity level."

He pointed out that the market will shrink even further: “A healthy global economic forecast for 2018, positive car sales data in recent months, stronger 2018 year-on-year U.S. product consumption in January, and potentially tighter global product markets are expected to boost gasoline and distillates demand."

But even though OPEC is all but saying its mission to rebalance the market has been accomplished, Barkindo on Thursday eagerly reiterated reports among OPEC members that the cartel would extend its reduction pact into 2019.

He told Reuters that the initial draft of a longer-term alliance agreement between OPEC and non-OPEC producers would be discussed at their June meeting in Vienna: “There is growing confidence that the declaration of cooperation will be extended beyond 2018; Russia will continue to play a leading role.”

Media professed to be puzzled by OPEC's stance: Bloomberg Daybreak: Americas host Alix Steel said on Thursday, "I don't get it: they say the glut's cleared; why are they going to extend the cuts? That will only mean a massive upside for oil." 

To which Daniel Dicker, founder of The Energy Word, replied, "Yes: it means massive upside for oil - which I think has been my theme with you for the past year and a half."

The irony to all of this, which first came to light last month, is that the methods by which OPEC determines the overall health of the global market is questionable.

The issue was raised again this week by Aziz Yahyai, a senior research analyst at OPEC, who told a seminar in New Delhi that “There is some improvement: two or three years ago, the discrepancy [in different calculations of global demand] was about 2 million barrels per day and now it is about 1 million.

But he added that a discrepancy of 1 million bpd is still roughly 1 percent of the global market, making it hard to produce accurate forecasts: “Global stock levels are the source for checking the accuracy of supply and demand numbers; however, the lack/inaccuracy of stocks data makes an accurate assessment very difficult.”

In February, Khalid al-Falih, energy minister for Saudi Arabia, admitted that the metrics used to calculate stockpiles is flawed - and this caused OPEC president Suhail al-Mazroui to mention the possibility of considering other metrics - including a seven year average instead of five - in the near future.