Opec Struggling To Keep Up With Rival Producers

All signs are pointing to a growing oil glut in the medium term as Opec this week acknowledged the growing reality that its crude is being squeezed from the market.

Opec’s latest Monthly Oil Market Report (MOMR) released 14 March brings Opec more in line with the IEA in projecting demand for Opec crude falling in 2018.

This is the first time Opec has projected demand for its crude (the ‘call on Opec’) falling in 2018. The group projects the call dropping 250,000 b/d from 32.86mn b/d to 32.61mn b/d (see chart). By contrast, last month it was projecting the call edging up 10,000 b/d. Its latest figures are broadly in line with the IEA’s latest Oil Market Report (OMR), released 15 March, which has the 2018 call falling 390,000 b/d to 32.42mn b/d.

Nevertheless, both organizations still see demand outstripping supply over the course of 2018, and therefore stockpiles falling from their current levels. Opec’s figures imply that stocks could fall around 150mn barrels from current levels, while the IEA’s numbers posit a more cautious 80mn barrel drop.

To put this in perspective, the IEA says OECD crude inventories stood at 2.87bn barrels at end January, 53mn barrels above Opec’s favored five-year average benchmark. Opec puts 2.87bn as being 50mn above the benchmark. Data from each organization implies that this will be reached towards the end of 3Q 2018, partially due to further inventory drawdowns from mid-year, but also because of the average’s inexorable upwards march. Although the five-year metric is flawed, it remains Opec’s primary benchmark.

OPEC’S RIVALS SURGE

On the surface, this is clearly positive news for Opec, implying that the group can begin unwinding its production cuts once the current output deal expires at the end of the year. But it’s far too early to be proclaiming balance given the astronomical non-Opec production gains.

Opec revised up its 2018 expectations for non-Opec production growth by 260,000 b/d to 1.66mn b/d still slightly less than the IEA’s projected 1.78mn b/d. Crucially, the gains accelerate over the course of the year, with the overwhelming majority slated for 4Q 2018.

The IEA and Opec monthly reports won’t show 2019 figures until June and July respectively, but the surge in non-Opec production shows little sign of slowing much in 2019. The IEA’s ‘Oil 2018’ five-year market outlook, published earlier this month, expects 2019 non-Opec growth of 1.5mn b/d, outstripping expected global demand growth of 1.2mn b/d (MEES, 9 March).

The IEA continues to warn that investment shortfalls in recent years are paving the way for a future supply crunch, and projects growth falling to 600,000 b/d in 2020 and 500,000 b/d in 2021. This drop-off in supply would free up space for Opec to exit its supply cuts without sparking a new price collapse.

But is the IEA underestimating prospects for non-Opec supply growth by fixating on US unconventionals? Major IOCs are beginning to increase their planned capex spend again in 2018, with the five largest set for a cumulative $1.08bn annual rise despite prices remaining low. The global deepwater in particular appears to be a key growth area for 2018 and beyond (MEES, 9 February).

A report from investment bank Citi this week emphasizes the growing potential for major supply gains outside of US shale. It estimates that on top of major falls in production costs, “time to first oil for deepwater projects is also being cut in half.”

Along with maintaining momentum for non-Opec supply growth, this will also help diversify the new crude slate. US shale oil is overwhelmingly light and sweet, but it looks increasingly likely that medium and heavy crudes from elsewhere will be added to the mix.

FINDING A HOME

One could assume that additional US liquids output will immediately find a home overseas and displace rival volumes from Opec and elsewhere. But it’s rarely so simple. Many refineries are geared up to process heavier volumes and won’t simply switch to lighter grades. The US itself is a case in point, as gross imports rose to a five-year high 7.9mn b/d last year, even as exports soared, as refiners preferred to run on overseas grades.

Moreover, the wealthy Gulf states are pushing various strategies to lock in demand and shut out rivals. The UAE for instance is boosting relations with buyers by offering them stakes in its major upstream concessions (MEES, 16 March). It is also belatedly seeking to emulate Kuwait and Saudi Arabia in securing stakes in overseas refineries, a growing trait for GCC countries. Moreover, these three all plan sizeable additions to their own domestic refining fleet in the coming years, as does non-Opec neighbor Oman (MEES, 1 December 2017).