Oil Storage Remains Full, Cutback Extension Won't Clear it Or Raise Prices: Analyst

Traders think the prospect of OPEC deepening its cuts is unlikely.

The contention from many quarters that stockpiles are gradually depleting thanks to production cutback initiatives has been proven false by the latest monthly report from the International Energy Agency, which calculates that inventories in industrialized nations totaled 3.025 billion barrels at the end of March - about 300 million barrels above the five-year average.

Worse, the IEA predicts stocks will rise further in April.

Dutch consultancy PJK International reports that refined fuel inventories have also jumped suddenly, with gasoil in tanks in the ARA hub rising to an eight-month high earlier this month; and in Houston, stored oil stocks touched record levels at the end of March, according to Genscape.

Meanwhile, although China stocks have hit their lowest level in four years, South Korean inventories are at a near record level.

All this prompted Amrita Sen, chief oil analyst at Energy Aspects, to remark, "People were impatient and thought we'd start drawing 10 million barrels a day since the first week of January.

"We're still in excess, and there's lots of inventory around."

This is presumably bad news for boosters of the Organization of the Petroleum Exporting Countries (OPEC), who are calling for an extension of the cartel's cutback initiative on the grounds that the initial cutbacks have brought the market closer to rebalance.

Edward Bell, commodities analyst at Emirates NBD, told Bloomberg television that if an extension is agreed upon at the OPEC Vienna meeting this week, the cuts probably won't have much of a beneficial impact - if the depth of the cuts remain the same: "It's not really enough to have a big impact in terms of supporting prices much beyond where we're at now."

He added that while OPEC can control inventories to a degree, in terms of influencing all-important demand, "they have little control over that."

So now as the Vienna meeting grows nearer, the question is, will OPEC nations consider deepening their cuts as well as extending the duration of the cutbacks?

OPEC sources on Friday told Reuters that the matter will be considered, but as for pre-talks leading up to the meeting, one source said "We have not agreed on final scenarios."

While it's anyone's guess what will ultimately be decided in Vienna, John Kemp, market analyst for Reuters, writes that "among oil traders, the consensus seems to be that the ex ante probability of deeper production cuts is very low while the probability of a rollover is high.

"In the event of a rollover, prices are likely to remain flat, or even come under mild downward pressure, as the residual threat of a cut is removed."

Last week, Gene McGillian, VP of market research at Tradition Energy, said that with increased production in Libya and Nigeria as well as the U.S., sticking to the current cuts is not enough: "When you balance that cut with the increase in other areas it's probably a net-cut of half a million a day.

"The question is whether that 1.8 million barrel cut is enough to cut that overhang."