Output, Export Gap Bedevils OPEC Goals
One of the factors behind the recent slump in crude oil prices may be the realisation among market participants that there is a difference between production cuts and export flows.
While OPEC and its allies appear to have been relatively successful in implementing their planned output cuts of 1.8 million barrels per day (bpd), this has yet to show up in a meaningful way in the amount of crude oil being transported by ships.
The seeming easy availability of crude despite the output cuts helped drive crude prices lower, with Brent dropping as low as $46.64 a barrel on May 5, just above the close of $46.38 on Nov. 29, the day before OPEC and its allies announced the deal to trim production and down about 20 percent since its recent peak in early January.
The 11 members of the Organization of the Petroleum Exporting Countries that agreed last November to restrict output by 1.2 million bpd for the first six months of 2017 achieved 90 percent compliance in April, according to a Reuters survey.
Output by the 11 countries was 29.92 million bpd in April, up fractionally from 29.9 million in March and only about 116,000 bpd above the agreed target.
The non-OPEC countries that agreed to curb their output by a combined 600,000 bpd also largely claim to be compliant, with major producer Russia saying it has exceeded the 300,000 bpd it agreed to cut as part of the deal aimed at boosting oil prices.
Top OPEC producer Saudi Arabia and Russia appear to be in favour of extending the agreement for another six months, a move that is likely to be confirmed when OPEC and its allies meet on May 25.
Ultimately the output cut is supposed to tighten the oil market by reducing supplies and draining inventories.
The problem is assessing how successful OPEC and the other producers are being in this endeavour.
One method is to look at vessel-tracking data as an indicator of physical flows.
While ship data doesn't capture oil moved by pipeline, it still represents more than half of the global market and is therefore a useful indicator.
The broadest measure of the data captures all movement by tankers, including domestic voyages and ship-to-ship transfers, and provides a universal picture of the amount of crude moving around the world.
In April this totalled 45.23 million bpd, down from March's 46.4 million bpd and February's 46.2 million bpd, but up from January's 44.3 million bpd, according to Thomson Reuters' Eikon vessel-tracking and port data.
For the first four months of the year, the average was 45.5 million bpd, which was actually higher than the 45.1 million bpd in the last four months of 2016.
While this wide measure of data does show that there is no shortage of oil being shipped around the globe, it doesn't say how much of this is new production being exported or inventories being drawn down.
OPEC EXPORTS DOWN
To gain a clearer picture of how much OPEC is actually exporting, the data can be filtered to show only vessels that have discharged their cargoes, are in the process of discharging, or are underway to their destination.
On this basis, OPEC members exported 24.7 million bpd in April, down from 25.6 million bpd in March and 26.4 million bpd in February, and level with January's exports. This is only tanker exports, and doesn't count any pipeline movements.
For the first four months of 2017, OPEC exports by tanker averaged 25.4 million bpd, down from 26.1 million bpd for the preceding four months.
This represents a drop of 700,000 bpd, which is below the pledged output cut of 1.2 million bpd, suggesting that OPEC members may have been drawing down internal inventories in recent months.
But it's also worth noting that the reduction in exports by OPEC doesn't appear to have resulted in less oil moving by tanker, meaning the shortfall has been made up by producers outside the agreement pumping more crude, or by inventories being drawn down.
The question of inventories emerges as the key factor for the success of the deal between OPEC and its allies.
If global crude flows by tanker were higher in the first four months of this year compared to the preceding four months because of producers outside the agreement pumping more, this is bearish for OPEC and shows the group has considerably more to do in order to boost the price.
On the other hand, if global crude flows were being bolstered by inventories being drawn down as market participants feared the market was heading for backwardation, then this may be bullish over the medium to longer term for OPEC's aim of increasing the price.
This makes inventory levels key to the outlook for prices, and this is an area with incomplete global data.
While detailed information is available for many developed countries, data is patchy or non-existent for much of the developing world.
But what is known is that U.S. crude inventories fell by a smaller than expected 930,000 barrels last week to 527.8 million barrels, but they are also 3 percent higher than a year ago.
OPEC said on April 12 that inventories in OECD nations dropped in February, but were still 268 million barrels above the five-year average.
This suggests that OPEC and its allies still have a long road to travel to drain inventories, and that the market may not re-balance as quickly as they would prefer.
By Clyde Russell
