OPEC Unease Keeps Crude Prices Flat Despite Further Signs of Declining Inventories

While anticipation of a fruitful Organization of the Petroleum Exporting Countries (OPEC) meeting on Friday caused traders to boost crude prices earlier this week, their optimism has turned into trepidation, with the result being that West Texas Intermediate on Thursday dropped 13 cents to settle at $50.55 per barrel; by contrast, Brent rose 14 cents to end the session at $56.43 per barrel.

Fishing for reasons behind the change in sentiment, John Kilduff founding partner at Again Capital, suggested that crude has risen high enough to tempt countries to boost production above agreed levels, and that "compliance looks to be a bit of an issue" if prices rise much further than where they are now.

He added, "I don't think it's a sure thing they extend the deal at this meeting anyway," in reference to attention paid of late to the prospect that the cartel will extend its oil reduction initiative beyond the expiry date of March 2018.

Thursday's unease among the trading community coincides, ironically, with news that Total SA, Vitol Group, and Mercuria Energy Group Ltd. are selling crude they hoarded in Saldanha Bay, South Africa, (one of the world's largest crude storage facilities) as the physical market tightens due to booming demand.

Marco Dunand, chief executive officer for Mercuria, said, "The market is selling inventories from everywhere."

Dunand was quoted earlier this month as saying, "Backwardation is going to increase a bit; we are seeing a reduction in global inventories, although we can see another build-up in the first quarter of next year."

To which Amrita Sen, chief oil analyst at consultant Energy Aspects Ltd., added that the shift of the Brent curve toward backwardation is "proof that the oil market is re-balancing; physical crude differentials are strong globally."

Still, while the bulk of industry reporting is now beginning to lean heavily towards the contention that a meaningful market rebalance is finally underway, Kilduff's point that rising prices inspire intensified production is borne out in the case of Russia, whose  top oil producer Rosneft will reportedly supply 600,000 barrels per day (bpd) of crude to PetroChina in 2018 - an increase of 50 percent from this year - after completion of the second East Siberia Pacific Ocean pipeline.

Accordingly, Liaoyang Petrochemical Corp, in Liaoning province, is expected to double its refining capacity to 400,000 bpd by the end of 2018.

While this puts Russia ahead of Saudi Arabia in exports to China, the Saudis are finalizing a deal with PetroChina to invest in the new Yunnan refinery; they also have a separate supply pact with state-run China National Offshore Oil Corp., which is starting up a new 200,000 bpd plant in south China.

At best, the mixed messages caused by the proliferation of crude data and events such as the OPEC meeting render any decisive stance about the market's health virtually impossible: earlier this week, as trader optimism over OPEC sent prices to a four month high, the Energy Information Administration released numbers showing that U.S. crude supplies climbed by 4.6 million barrels for the week ended September 15, far above an earlier forecast of a 2.4 million barrel rise.