(Fixes spelling of analyst's name in paragraph 9)
By Ahmad Ghaddar
LONDON Feb 10 An OPEC-led production cut may
well be accelerating a drawdown in global oil stocks that began
last year, but implementing the reduction for just six months
means the producer group will fall short of achieving its
objective of rebalancing the market.
The Organization of the Petroleum Exporting Countries and
non-OPEC producers in December reached their first deal since
2001 to curtail oil output jointly, by around 1.8 million
barrels per day.
In the months leading up to the deal and after it was
struck, OPEC ministers said tackling an overhang in crude and
oil product inventories that has depressed oil prices for over
two years was one of their main objectives.
So far, OPEC kingpin Saudi Arabia, which is contributing the
biggest chunk of the cut, has said the deal does not need to be
extended beyond a six-month period.
This contrasts with price hawk Iran, whose oil minister
Bijan Zanganeh said OPEC should cut production further in the
second half of 2017. Under the deal, Iran was allowed to boost
output slightly above October levels.
The International Energy Agency (IEA) said inventories of
crude, natural gas liquids and oil products in member countries
of the Organisation for Economic Cooperation and Development
(OECD) remained 286 million barrels above the five-year average
of around 2.7 billion barrels. This is despite a draw of 800,000
bpd in the fourth quarter of 2016.
The overhang is almost evenly split between crude and
liquids on one side and oil products on the other.
The agency forecasts a stockdraw of 600,000 bpd in the first
half of 2017 if compliance with the output deal is maintained at
"If OECD stocks were to continue to draw in 2017 at the same
pace as that seen over July-December, then it would take us
around a year to return to the five-year average in stocks," IEA
oil analyst Olivier Lejeune said.
The problem for OPEC is that while high compliance with the
agreed production cuts will help to bring down stocks, demand
underperformance and rising non-OPEC supplies could temper the
effectiveness of the move.
"What it (OPEC and non-OPEC cut) does is basically avoid an
even worse surplus than what has been the case in 2015 and the
first half of 2016," said David Wech, managing director of
consultancy JBC Energy.
"But it does not eliminate (the surplus) in the first half
of the year," he added.
Oil supply is expected to grow year-on-year in the first
half of 2017 in large non-OPEC producers such as Canada, Brazil
and Kazakhstan, BNP Paribas said in a research note this week.
"The key question is the extent of the renaissance of the
U.S. shale oil sector, given a continual rise in the rig
activity since May 2016 and high hedge ratios for 2017 among
producers," the French bank said.
A threat to the deal's success could also come from within
OPEC as Libya and Nigeria, which are exempt from the cuts, raise
output. Libya has added 190,000 bpd of production since October.
While OECD stocks are declining, inventories in non-OECD
countries have been crawling up - especially in China and India,
where reliable data on stock levels is harder to find.
Stock balances for China, the IEA has said, show an implied
build of about 600,000 bpd for August to November.
The rebalancing, therefore, could be uneven: shifting an
overhang from one region to another.
OPEC and Russia have so far shielded Asia from export
reductions stemming from lower output, mainly focusing on the
United States and Europe.
That could lead to continued builds in Asia as key producers
fight for market share there.
"Our view has always been that there was a good chance of an
extension largely because we always recognised that the focus
was on bringing down that overhang and that that process is very
likely to take more than six months," Energy Aspects analyst
Richard Mallinson said.
Energy Aspects estimates the global commercial
overhang(excluding strategic petroleum reserves) was just under
400 million barrels at the end of last year.
This includes about 300 million barrels from the OECD and
100 million barrels from non-OECD.
The energy consultancy forecasts a stockdraw of around
700,000 bpd on average over the first half of this year.
"It could be higher if the current higher demand trend
persists," Mallinson said.
(Additional reporting by Dmitry Zhdannikov; Editing by Dale