May 24, 2017 / 1:37 PM / 6 months ago

OPEC still battling oil glut after five months of cuts

    * OPEC-led cuts initially agreed for six months to June
    * Producers now considering nine-month extension to March
    * Cuts aim to reduce inventories to five-year average
    * Limited data, other variables hinder forecasting

    By Ahmad Ghaddar
    VIENNA, May 24 (Reuters) - How long will it take for oil
inventories to drop to normal levels? That's the question OPEC
and oil markets are grappling with before Thursday’s meeting of
producer countries in Vienna.
    At just over 3 billion barrels, stockpiles in consumer
nations are about 300 million barrels above their five-year
average, little changed from levels in December when the
Organization of the Petroleum Exporting Countries and its allies
agreed to cut output by about 1.8 million barrels per day (bpd).
    The cuts were initially agreed to run during the first half
of 2017. OPEC and other producers, including Russia, are now
expected to agree to extend the deal on Thursday, possibly for
nine more months until March.
    OPEC expects inventories to return to the five-year average
of 2.7 billion barrels by the end of 2017. Other experts see a
longer overhang, with one institution seeing it lasting into
    OPEC has repeatedly said eliminating excess stockpiles was
one of its main goals but inventories remain stubbornly high.
OPEC states have cut output at the wellhead, but kept exports to
consumer countries high by draining their own stockpiles. 
    The Paris-based International Energy Agency and most other
experts say global oil demand is outstripping production, so at
some point stocks held in consumer states will start to drop.
    But making forecasts is fraught with uncertainty because it
depends on assumptions about supply and demand, the rate of
exports from storage from producer nations and guesswork about
storage in nations such as China, which does not disclose data.
    The IEA releases monthly data for inventories held by the
OECD group of industrialised nations, saying stockpiles of
crude, oil products and other liquids at the end of March stood
at 3.025 billion barrels.
    But IEA inventory analyst Olivier Lejeune said this only
covered 50 to 60 percent of the global picture, including
inventories in Western Europe, North America, Japan, South
Korea, Australia and New Zealand.
    It does not track stockpiles in China and India, the world's
No. 2 and No. 3 oil consumers.
    The United States, an OECD member whose Energy Department
releases weekly U.S. inventory data, is the
world's biggest crude consumer.
    Jeffrey Currie, head of commodities research at Goldman
Sachs, is among the most bullish on the rebalancing timetable.
    "Do I want to be long oil? The answer is absolutely yes,
because you're going into a deficit market," Currie said this
month, adding the global supply deficit could be 2 million bpd
by July. He did not say when inventories would return to normal.
    Asset management firm AB Bernstein said in a May 16 report
that OPEC cuts would "lead to accelerated inventory drawdowns in
the second half of 2017, but the return to normalized
inventories will ... drag into 2018."
    Assuming a 1 million bpd deficit based on EIA supply and
demand data, it would take 11 months to eliminate the glut, it
said. "The agreement by OPEC to extend cuts into 2018 is
critical," the AB Bernstein report said.
    Financial firm Natixis sees rebalancing extending into 2019.
"Based on our current levels of withdrawals, expected at 280,000
bpd, that means at least two and half years, unless withdrawals
increase rapidly," chief energy analyst Abhishek Deshpande said.
    OPEC sees the market rebalancing by the end of 2017. "With
the current rate of compliance we arrive at the five-year
average by year-end, not 2018," an OPEC source told Reuters.
    Algerian Energy Minister Noureddine Boutarfa echoed that
timeline. He also told Reuters that extending cuts to March 2018
aimed to take into account traditionally weak demand at the
start of each year.
    IEA inventory data have offered little clear guidance. OECD
inventories in March of 3.025 billion barrels were 32.9 million
barrels lower month-on-month but were a rise of 24.1 million
barrels over the quarter after a big build in January.
    The first quarter rise is partly seasonal, as demand falls
in the period when European and U.S. refineries usually conduct
maintenance. Stockpiles also grew after record OPEC export
volumes to the OECD in the fourth quarter of 2016, the IEA said.
    Exports from Saudi Arabia, OPEC's biggest producer, were
some 600,000 bpd higher in the fourth quarter 2016 compared with
the average for January and February, according to official data
data the kingdom submitted to the Joint Organizations Data
Initiative (JODI) 
    OPEC's cuts came into effect on Jan. 1. 
    The IEA has said it did not expect the inventory glut to be
eliminated by the end of 2017, basing its assumption on OPEC
output staying at April's levels of 31.8 million bpd with an
implied drawdown of more than 700,000 bpd for the second half of
the year.
    OPEC and other producers must now decide how much longer
they need to extend cuts to rebalance the market. OPEC ministers
suggest consensus is building around the nine-month extension.
    But Vienna-based JBC said nine months would not be enough.
"In our current base case, we see 2018 as being strongly
oversupplied, to the tune of close to 1.5 million bpd in the
broader oil complex on average for the year," it said this week.
    Only with an extension for the whole of 2018 and 100 percent
compliance with cuts "can we envisage a market which is more or
less balanced," the JBC analysts wrote.
    The table lists differing views on the timetable for
returning OECD inventories to the five-year average of 2.7
billion barrels:
 Organisation  Total OECD    Comments
               stocks by     
               end of 2017   
               (in million   
 Commerzbank   Glut could    Scenario 1: OECD inventories
               be            would decline by 27 mln bbls
               eliminated    in Q2 if OPEC production
               in case of    cuts maintained and fully
               extension     implemented until end June.
                             Scenario 2: OECD inventories
                             would decline by 324 mln
                             bbls by year-end if OPEC
                             production cuts will be
                             maintained and fully
                             implemented until end 2017
                             Scenario 3: OECD inventories
                             would decline by 108 mln
                             bbls by year-end if OPEC
                             production cuts not extended
                             and OPEC production rises
                             back to the pre-cut level in
                             H2 2017.
 Santander     Market        Lower than current - but
               remains       still full relative to
               oversupplied  5-year (and longer term)
                             historic levels
 Raymond       2,846         More bullish on demand than
 James                       IEA.  "IEA has typically
                             been overly conservative in
                             its initial quarterly demand
                             forecasts by 400,000 bpd on
                             average due to either
                             incomplete or ambiguous data
                             received on the country
 Commodity     2,924         Assumes OPEC/non-OPEC
 Research                    rollover and production of
 Group                       around 32.1 mln bpd. Assumes
                             non-OPEC compliance at 0.45
                             mln bpd cutback in 2H.
                             Assumes global GDP growth of
                             around 2.95 to 3.15 percent.
                             US production growth of
                             around 65,000 b/d monthly
                             from May to December.
 Nomisma       2,750                                     
 JBC           Market        Only a cut throughout 2018,
               remains       with 100 percent compliance
               oversupplied  can market be "more or less
 Natixis       Market        It would take market 2-1/2
               remains       years to work through glut
 BNP Paribas   Unlikely      Stock draws at 600,000 bpd
               glut is       this year
               by year end   
 Bank of                     If deal is extended for
 America                     6-months: global imbalance
 Merrill                     turns into 830,000 bpd
 Lynch                       deficit in H2 2017
 AB Bernstein  Market        11 months required to
               remains       eliminate glut 
 PVM           Market        OECD stocks could normalise
               remains       in Q2 or Q3 2018 in case
               oversupplied  cuts are extended for coming
                             three quarters
 Facts Global  Market        The OPEC deal will have to
 Energy        remains       be sustained right through
               oversupplied  2018 for OECD inventories to
 (Editing by Edmund Blair)

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