Saudis Insist Market Re-Balance Is Imminent Although Oil Tanker Storage Growth Suggests Otherwise

Once again, Khalid Al-Falih, energy minister for Saudi Arabia, has gone to the press insisting that the oil market will re-balance, as early as the fourth quarter of this year, and despite rising production in the U.S., Libya, and Nigeria.

However, his optimism flies in the face of news on Monday that the amount of oil stored in tankers reached a 2017 high of 111.9 million barrels earlier this month, according to Paris-based Kpler SAS - a sure sign the market is nowhere near the re-balancing the Saudis and the Organization of the Petroleum Exporting Countries (OPEC) are attempting with the extension of their production cutback agreement.

Al-Falih told the London-based Asharq al-Awsat newspaper that "The forecasts that the oil market will re-balance in the fourth quarter have taken into consideration the rise in shale oil production," and the growth of crude output from Libya and Nigeria isn't a threat because "the level of increase from these two countries is still within the limits set by the Algeria agreement of 500,000 barrels per day."

Al-Falih blamed market volatility on speculation and claimed that inventories on land and at sea are falling, with oil stored on floating marine facilities supposedly dropping by 50 million barrels and  inventories in countries in the Organization for Economic Cooperation and Development dropping by 65 million bpd; he added that experts are fixated on bloated U.S. stockpiles "where decline rates in inventories are less than expected" and neglect to recognize dwindling stockpiles elsewhere.

But the figures cited by the energy minister are questionable, and Bloomberg noted that Libya's oil production has reached about 900,000 bpd, according to an anonymous insider; Jadalla Alaokali, an National Oil Corp. board member, confirmed that the country was pumping 700,000 bpd at the end of April, and Mustafa Sanalla, chairman for NOC, said Libya plans to pump 1 million bpd by the end of July.

As for the marine storage, Kpler says higher volumes of storage in the North Sea, Singapore, and Iran account for most of the increase in marine storage in June; "If anything, it shows that OPEC cuts still aren't having enough of an impact," said Olivier Jakob, managing director of Petromatrix GmbH, adding that "the pressure is coming from the Atlantic Basin" where there are additional supplies.

It looks like the build will continue: Pareto Securities AS stated in a note that companies including Trafigura Group and Vitol Group have recently chartered older supertankers for as long as eight months, likely for floating storage.

Further discrediting Al-Falih's assertion that a re-balance is imminent is the disclosure from Bloomberg that Iraq, OPEC's second largest producer, hasn't complied with the cartel's cutback agreement during any month this year.

Bloomberg noted, "For OPEC and its allies, draining the world's oil glut suddenly looks much harder."

Last week the Saudis claimed that crude inventory drawdowns will accelerate in the next three to four month, just as Friday trading resulted in the longest run of weekly losses since 2015.