(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON May 17 Reported oil stocks have fallen
much more slowly than OPEC anticipated at the beginning of the
year, leading to scepticism about the effectiveness of the
organisation's production cuts.
But the sluggish response may reflect the repositioning of
formerly uncounted stocks to more visible locations rather than
a failure to adjust the supply-demand balance.
In general, crude oil and refined products move down the
supply chain from areas of net production to areas of net
Despite significant trading activity around particular
cargoes, the movement of crude and products essentially occurs
in only one direction.
For commercial reasons, it makes no sense to move crude and
products back up the supply chain, away from consumers and back
towards refiners and producers.
Crude and products stocks are positioned as close to
refiners and final consumers as possible, subject to the
availability and cost of storage.
OPEC ministers and officials have stated that the objective
of production cuts is to eliminate the overhang of excess oil
stocks and reduce inventories to the five-year average level.
Ministers and officials most often reference commercial
crude and product stocks held in OECD member countries when
talking about the overhang and market rebalancing.
OECD stocks are the most accurately and frequently reported
so in some ways it makes sense to use them as the benchmark for
assessing whether the production cuts are working.
The problem is that they are not necessarily representative
of stockpiles held in producing and consuming countries outside
According to the International Energy Agency, total OECD
commercial stocks rose during the first quarter of 2017, but
this was largely offset by a reduction in floating storage and
stocks held outside the OECD ("Oil Market Report", IEA, May
The diverging behaviour of OECD and non-OECD oil stocks
reflects their differing locations along the oil industry's
While OECD countries are substantial net importers of crude
and consumers of refined products most of the major
oil-exporting countries are located outside the OECD.
OECD refining centres also contain lots of inexpensive
storage options which make them the preferred choice for holding
non-operational or speculative inventories.
The result is that storage tanks in the OECD tend to be the
first to fill during a period of oversupply and the last to
empty when global stocks are falling.
By targeting OECD stocks, OPEC has made achieving its
objective harder in the short term, because these stocks will be
the last to respond to its production policy.
There is some evidence excess global inventories have
already fallen, with reductions in oil-exporting countries,
floating storage and remote locations part way between producing
and consuming centres.
Excess stocks are gradually being pulled along the supply
chain from producers, floating storage and remote locations
towards the major refining centres in the OECD.
But the behaviour of the supply chain introduces an
important non-linearity into the response of OECD stocks to
OPEC's production policy.
OECD stocks are likely to fall slowly at first, then
accelerate once producer stocks and floating storage have been
As a result, OPEC's production policy often tends to appear
relatively ineffective at first before gaining traction later.
In this instance, the stubbornly high level of OECD oil
inventories during the first quarter of 2017 may have masked a
broader tightening in the supply-demand-inventory balance.
Inventory movements coupled with stronger seasonal
consumption during the northern hemisphere summer could result
in a more pronounced decline in OECD stocks during the second
and third quarters.
(Editing by David Evans)