OPEC Complies – But Why Are U.S. Inventories Building?

One of the frequent discussion in the Five Star Standard is about worldwide production numbers and the relative difficulty in measuring data.  Indeed, in past editions, we have spoken at great lengths about how data is measured, why there are often huge discrepancies, and the fact that the U.S. is one of the most transparent countries in terms of measuring production and inventory.  But even in the U.S., the differences between reserve estimates by API and the EIA can be radically different in any given week.

One of the interesting topics of conversation lately (particularly in light of continuing increases in U.S. storage and oil imports over the past few weeks), is OPEC compliance with their agreed production cuts.  In the last edition, we gave you some estimates.  But what is interesting is that over the past several weeks, I have read many articles (from very reliable sources that I will cite to below) that have radically different numbers for OPEC compliance.

So how is OPEC doing?  Well, lets look at just two conflicting views from what we have heard over the past two weeks.   

• On February 02, 2017, Angelina Rascouet and Julian Lee of Bloomberg reported that OPEC had cut 840,000 barrels a day last month, or about 60% of the total they agreed to.  But they did clarify that if you take out the production increases from Iran, Nigeria, and Libya (that were permitted to increase production under the terms of the agreement), output had been cut 83% of the total promised.
• Remember before that and as we reported that Saudi Arabia alone had claimed to have removed a million barrels from supply (or most of the agreed cuts).
• Turns out, it may be 91%.  According to a Platts survey, The 10 OPEC members obligated to reduce oil output under the landmark agreement signed late last year achieved 91% of their required cuts in January, with their production falling 1.14 million b/d from October levels.

In all, OPEC's 13 members -- not including Indonesia, which suspended its membership at the group's last meeting -- produced 32.16 million b/d in January, a 690,000 b/d decline from December, the Platts survey showed.

But, Ty, you say – your own data shows that U.S. inventories keep increasing, what’s going on?  I’m going to tell you – first of all, don’t worry.  OPEC ramped up production right before the deal.  That gave each member better bargaining power vis-à-vis one another.  Saudi Arabia and others hit their high (some estimate they only had about 2 million bpd of total extra production capacity before they couldn’t produce any more even if they wanted to).  So they pumped a lot of oil!

Second, the deal didn’t go into effect until January 1, 2017.  So during the month of December OPEC had EVERY incentive to pump as much crude as they possibly could.

Third, there is a logistics issue.  It takes a tanker some time (over 30 days) to reach the U.S.  If you assume 45-60 days of transit time,  we are now seeing the results of heavy December production.  I would say more telling as to the effect, if any, of the OPEC cuts will be inventory numbers in March.

I want to point out here – there are many very smart people who take a very cautious view.  They believe that rising U.S. rig counts, increasing production from OPEC members not obligated to cut production, among other factors, will more than offset OPEC production cuts and allow the world to remain awash in oil.  And of course, there is some cheating by OPEC members already.  And these smart people may be right.  

In the interim, I would tell you to watch the trends.  World oil use is expected to increase this year more than predicted according to the EIA, which revised their global demand projection upward by a significant amount.  Shale gas in North America,  even if it were to boom, only accounts for about 5% of the oil supply.

And on a more intellectual note I will remind you of a few words of caution I have given before.  First, measuring production is incredibly difficult.  Even when well intentioned.  This makes planning our business even more difficult as we can see multiple reliable sources with radically different numbers.  With no clear data, we have to use a bit of our “gut” to feel the market and to see where it is headed.  As I have emphasized many times in the past, you shouldn’t look to one point of data to make your projections for the future.  Instead, look at multiple points of data (OPEC agreed to cuts, here’s what countries are shouldering it, here is there historical compliance rate), and overall trends (barrels in storage are increasing, rig count is increasing, etc.)  But then balance those trends against the countervailing issues (storage is increasing but refinery utilization rates are lower, we haven’t started the summer driving season, weather patterns have been warmer than normal, tankers from December are just now reaching the U.S.).    And look to discern the trend – not the bits and pieces of often conflicting data.

By: Ty Chapman
Five Star Metals, Inc.
Raising the Bar for Customer Service and Quality
Twitter: @FSM_TY

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