After a year of production cuts, OPEC and Russia are finally near
their goal of shrinking the world’s swollen oil inventories. So why are they
planning to change
their target?
The answer lies somewhere between the murky and incomplete nature of
oil data and the competing interests within the producers’ group.
The 24-country alliance wants to reduce oil stockpiles to their
five-year average, a goal that is almost at hand according to figures from the
International Energy Agency. Yet Saudi Arabia and Russia now say that metric is
flawed -- distorted by years of excessively high supplies and patchy data
outside developed economies.
Choosing a different measure of success could further reinforce the
need for supply curbs to continue for the whole of 2018 -- something Saudi
Arabia is keen to ensure as it prepares the historic initial public offering of
its state oil company. Other methods might indicate the rebalancing of the
market is already complete, potentially allowing some producers to end their
self-imposed restraint.
Here are some of the possible options:
Take
Cover
Saudi Arabia Energy Minister Khalid al-Falih has said that, rather
than just comparing inventory levels to their average, OPEC should consider how
quickly they’re likely to be consumed. This gauge, known as forward demand
cover, measures inventories in terms of the number of days they will last.
There are good reasons for considering that measure -- it better
reflects how consumption has grown over the past few years -- but wouldn’t
necessarily back Al-Falih’s insistence that producers stick with the cuts all
year. Inventories in developed economies equated to about 60.6 days worth of
demand in December, according to IEA data, which is already back in line with
the five-year average.
A
Global Picture
OPEC hasn’t said it’s exclusively targeting inventories in the
developed world, but in reality there’s little reliable data for anywhere
outside the 34 countries that make up the Organization for Economic Cooperation
and Development. Those stockpiles were 52 million barrels above the five-year
average in December, according to the IEA.
It’s harder, but possible, to compile a global picture. Could data
from major consumers like China and India tell a different story?
According to Citigroup Inc., a global measure actually shows OPEC’s
mission is already
accomplished. Adding non-OECD countries including Saudi Arabia and Brazil,
as well as the crude stored at sea on tankers, to the mix shows inventories are
already at their five-year mean, the bank said.
Turn
Back the Clock
The oil market is emerging from a long period of oversupply that drove
prices to 12-year lows and lifted U.S. crude inventories to the highest level
in decades. That means any calculation of a five-year average “is overly
weighted by three years of excessive inventory,” according to Saudi Arabia’s Al-Falih.
The average has been rising steadily throughout the price slump. For
January, when the period included in the calculation switches from 2012-2016 to
2013-2017, the number will jump by so much that it almost converges with
current stockpile levels -- a rather hollow victory in OPEC’s quest to
eliminate the glut.
Some of that excess would be filtered out
by comparing inventories to an earlier period before the surplus emerged. Using
2011-2015 would indeed justify Al-Falih’s argument that OPEC has some way to go
before the job is done.
Source: Bloomberg