May 7, 2018
Rapidly rebalancing oil markets may lead to increased OPEC output in 2H-2018
In its April 2018 “Oil Market Report” the IEA all but declared “mission accomplished” as far as OPEC supply cuts are concerned. OECD oil inventories, which two years ago stood around 400 mb above the 5-year average, have fallen back to more “normal” levels and oil prices recently hit $75 / bbl for the first time since late 2014. The burning question on every tanker owners’ lips, therefore, is “when will OPEC open up the taps”?
In truth, this is a difficult question to answer as OPEC has not been explicit about what it’s exact target is. In the original wording of the Vienna agreement, OPEC talked about cutting global commercial oil stocks down to five-year average levels. However, this benchmark was never clearly defined. If we look purely at OECD stocks – where data is most transparent – then it seems like stocks are, indeed, back to five-year average levels. But outside of the OECD, the picture is a lot more murky.
What is clear, however, is that at current production levels global oil inventories are set to decline further in the rest of 2018. At present, OPEC is pumping roughly 0.7 mb/d below the “call on OPEC”, which implies a further decline in global oil inventories of 150–200 million barrels by the end of the year. A stock draw of this magnitude would likely take OECD oil inventories below 58 days of forward cover. To put this is perspective, the last time forward cover sank to these levels in 2014, oil prices were over $100 / bbl. With Venezuelan production continuing to sink, and with the threat of fresh US sanctions on Iran, it is feasible that much higher oil prices could therefore be seen during the second half of the year.
While it is unclear what OPEC’s exact end game is, we find it unlikely that they desire a return to the days of $100+ / bbl oil. As such, we anticipate that Saudi Arabia and other Middle East OPEC nations will look to increase their oil production in 2H-2018, which should give a boost to tanker demand later in the year.