OPEC has Achieved Market Rebalance, Says IEA, but Others Warn That A Rogue Iraq Could Reverse the Situation

by Ship & Bunker News Team
Thursday May 18, 2017

In its latest monthly report, the International Energy Agency believes the oil market has achieved a rebalance that will accelerate in the near term - however, it adds that because global stockpiles are so voluminous, even a vigorous decline driven by the Organization of the Petroleum Exporting Countries (OPEC) cutback initiative means that they won't reach the five year average until the end of this year and possibly the next.

In keeping its global demand growth forecast for 2017 unchanged at 1.3 million barrels per day (bpd), the IEA pointed out that commercial inventories fell for a second straight month in March, by 32.9 million barrels to 3.025 billion barrels, but that for the first quarter of this year stocks in industrialized countries rose by 24.1 million barrels - a phenomenon that continued in April as well.

It stated, "It has taken some time for stocks to reflect lower supply when volumes produced before output cuts by OPEC and 11 non-OPEC countries took effect are still being absorbed by the market.

"We might not have seen a resounding return to deficits [in Q1 2017] but this report confirms our recent message that rebalancing is essentially here and, in the short term at least, is accelerating."

As for the likelihood OPEC will decide to extend its cuts when the cartel meets on May 25, the IEA noted that "If, as a scenario and not a forecast, the current (OPEC) output cuts were to be extended for the rest of 2017, oil stocks would start to fall quite sharply ... but because they are falling from such a great height, they won't get down to the five-year average until much later in the year and possibly not then."

But as others suggest, even this mildly positive outlook could be derailed by rogue OPEC member Iraq: Helima Croft, global head of commodity strategy at RBC Capital Marketstold CNBC, "I think people will wait to see what happens at the May 25 meeting, because there could be some countries like Iraq that could say, 'We want to bring on more production ... we may extend until the end of the year, but we're not signing up going into 2018."

CNBC reminded readers that Iraq first asked to be exempt from the original 6 month OPEC deal; then it quibbled over the benchmarks against which the cuts would be measured; then caused ire when it declared it could raise output to 5 million barrels per day in the second half of this year; and most recently was found to have failed to reduce its production to the level it agreed to last November.

As forecasts both positive and negative escalate with regards to the outcome of the impending May 25 OPEC meeting in Vienna, the market on Wednesday maintained a positive stance, with West Texas Intermediate rising 39 cents to $49.05 and Brent climbing 50 cents to $52.15 -  despite data from the American Petroleum Institute  showing that U.S. crude stocks had risen by 882,000 barrels in the week ending May 12 to 523 million barrels.

Earlier this week, Croft stated that "Right now we are in this sort of $50-$55 range because, yes, OPEC is willing to do whatever it takes, but [U.S.] shale production is also an issue.

"This is the push-pull of the market right now."