Despite Cutbacks, OPEC's Supply/Demand Numbers Imply Stock Build In Months Ahead

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Robert Boslego

Summary

OPEC reported its January production at 32.1, 300,000 above its "effective" ceiling.

92% of the cuts are from the Gulf producers.

Current output implies a stock build of 9 million for 2017.

Ceiling production implies a drop of 100 million barrels, but stocks remain far above 5-year average.

In OPEC's February Monthly Oil Market Report (MOMR), it estimates that its January production averaged 32.1 million barrels per day (mmbd), down almost 900,000 b/d from December. More than half the amount (500,000) was from Saudi Arabia and 92% was from the Gulf countries (KSA, Kuwait, UAE and Qatar). Nigeria, Libya and Iran increased their production by 217,000 b/d.

OPEC had set a ceiling of 32.5, but that had included Indonesia's production of about 740,000 b/d. Because it quit OPEC, the "effective" ceiling is about 31.8. Therefore, OPEC produced about 300,000 b/d more than the ceiling it had agreed to at the end of November.

The production ceiling is intended to reduce global OECD inventories to their 5-year average this year. OPEC reported that OECD inventories stood at 2.999 billion barrels as of the end of December, 299 million barrels above their 5-year average.

OPEC updated its supply/demand tables for 2017. It does not calculate a balance because it does not forecast how much it will produce. It does forecast global demand and the volume of non-OPEC production. The difference between demand and non-OPEC supply is the "call on OPEC" crude oil.

In the table below, I provide two cases for OPEC production: the current (January) and the ceiling. Assuming OPEC continues to produce at the current level, the figures imply stocks will build by 99 million barrels in the first quarter and another 45 million in the second. Inventories would then drop by 45 million in the third quarter and 90 million in the fourth. In total, stocks would build by 9 million.

MMBD

1Q17

2Q17

3Q17

4Q17

Global Demand

94.8

94.9

96.8

96.8

Non-OPEC Supply

63.8

63.3

64.2

63.7

"Call on OPEC"

31

31.6

32.6

33.1

Current

32.1

32.1

32.1

32.1

Daily Stk Chg

1.1

0.5

-0.5

-1

Quarterly

99

45

-45

-90

Cumulative

99

144

99

9

Ceiling

31.8

31.8

31.8

31.8

Daily Stk Chg

0.8

0.2

-0.8

-1.3

Quarterly

72

18

-72

-117

Cumulative

72

90

18

-99

Assuming that OPEC can reduce production such that it averages its ceiling, inventories would build by 72 million in first quarter and 18 million in the second. They would subsequently drop by 72 million in the third and 117 million in the fourth. OPEC will have reduced the stock surplus by 99 million barrels, but it will still be 200 million above the 5-year average as December 2016.

They have a collective financial incentive to keep production at the target because that provides higher revenues than if they had not cut. But if Nigeria, Libya and Iran continue to increase their output volumes, other members have to cut deeper.

Only Saudi Arabia could actually earn more revenues by cutting back because it has a large enough production base. If it cut back another million barrels, and prices went up $10/b, its revenues would rise. But if smaller producers did that, they would lose too high of a percentage of their sales to make up the reduction with a higher price.

Conclusions

Despite all of the rhetoric by OPEC ministers, the production cutback is not going to reduce inventories to anywhere near the 5-year average based on numbers provided by OPEC's statistical team. I expect that increases in the combined production from Nigeria, Libya and Iran are going to put more pressure on Saudi Arabia and the other Gulf producers to cut deeper. Whether they will or not is an open question.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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