The annual US$2trillion global oil market is steadily returning to balance after three years of persistent supply glut and bloated inventories, as evidenced by improving fundamentals and forward market structure, according to Moin Siddiqui, economist
The past six months have seen revival of confidence in the industry with oil futures curve shifting from ‘contango’ to ‘backwardation’ i.e. where near-term prices are higher versus those for later delivery – hence making it unprofitable to store crude.
These positive signs are encouraging for oil-producers. OPEC Secretariat noted, “Both the global economic rebound, as well as strong oil market fundamentals, for the first time in so many years are all pointing to the right direction.”
Between 2008 and 2015, non-OPEC liquids supply growth was 7.9mn bpd, while OPEC liquids production rose 1.5mn bpd in the same period. Concurrently, a total of 9.4mn bpd growth within seven years led to global glut – resulting in a hefty 80percent decline in oil-price between June 2014 and January 2016. Not surprisingly, the oil-market was in deep recession.
The ‘Declaration of Cooperation’ whereby 24 oil-producers (led by Saudi Arabia and Russia) agreed to continue voluntary cuts of 1.8mn bpd until end-2018 could speed-up oil market re-balancing and de-stocking i.e. inventories drawdown. The big question is the durability of high compliance. OPEC members could abandon their pledges if tighter supplies in H2 2018 lead to price spikes. Russia has signalled its intention to exit when inventories drop to average levels. OPEC June 2018 meeting will be critical as global crude surplus narrows. However, OPEC will opt for a gradual lifting of production limits to avoid plunging prices.
Total Organisation for Economic Cooperation and Development (OECD) liquid fuels inventories last October was reportedly 100mn-barrels above five-year average, down two-thirds on January 2017. By mid-2018, inventories might edge toward five-year average level with a controlled exit in third or fourth-quarter that keeps stocks near such level “Global inventories will have re-balanced by mid-2018, leading to a gradual exit from the cuts,” noted Goldman Sachs.
