What Happened to the Oil Glut?

https://www.wsj.com/articles/what-happened-to-the-oil-glut-1523546157 

What Happened to the Oil Glut?

Stored oil is at its lowest level in more than three years, partly due to OPEC and Russia’s output cuts

By

Benoit Faucon,

Summer Said and

Anant Vijay Kala

April 12, 2018 11:15 a.m. ET

53 COMMENTS

A glut of stored oil that helped keep prices low for years is almost gone, thanks to production cuts by OPEC and Russia, a humming global economy and a series of small but meaningful supply disruptions.

Excess inventories of stored oil by the world’s industrialized economies are now at their lowest level in more than three years, based on a five-year running average, according to data released Thursday by the Organization of the Petroleum Exporting Countries. After months of steepening declines, the cartel said commercial inventory levels shrunk a further 17.4 million barrels in February, to about 2.85 billion barrels.

That represents a surplus of just 43 million barrels, based on the five-year average. Two years ago, the storage surplus hit 400 million barrels.

The drain on storage is partly a consequence of a concerted effort by Saudi Arabia, its OPEC colleagues, and Russia, to throttle back output to bolster prices.

Going, Going, GoneThe world's glut of stored oil has quickly disappeared.Total oil inventories in OECD countries compared with their five-year averages*

“The rebalancing process is well under way,” OPEC Secretary General Mohammed Barkindo told an energy summit in New Delhi on Wednesday.

The quickening depletion of excess stored oil has analysts throwing around a word they haven’t had to use that often in the past few years: shortages. Without much cushion in storage, the threat of supply outages can more quickly drain inventories—and boost prices.

Venezuelan crude output has been hobbled by political and economic instability there, and rising tensions between the U.S. and Russia over Syria have also contributed to worry over supply. President Donald Trump has threatened a missile attack against Syria, in retaliation for an alleged chemical attack by Syria’s government, which Moscow has backed during the country’s long civil war.

Syria doesn’t pump much oil itself, but the new tensions have raised the specter of bigger production outages across the oil-rich Middle East, should military action escalate. Many similar supply-shock worries have had only muted impact on oil prices in the recent past, thanks to the glut of oil in storage. With that cushion gone, analysts say geopolitics may again start playing an outsize role in oil markets.

“Global oil supply and demand are quickly approaching a balanced position after spending several years in an excessively high inventory mode,” said Dominick Chirichella, co-president of New York-based Energy Management Institute, in a report Wednesday. “Geopolitical risk is bubbling up in the oil pits.”

Ministers attend the OPEC meeting in Vienna on Sept. 22, 2017. Photo: joe klamar/Agence France-Presse/Getty Images

Saudi Arabia has indicated little appetite for opening up the spigots. In its report Thursday, OPEC said its collective production fell by an average 201,000 barrels a day. Part of the decline came from fresh, voluntary cuts by Saudi Arabia. Earlier this week, the kingdom said it would keep its overall crude-oil exports below 7 million barrels a day next month.

Saudi Oil Minister Khalid al-Falih told the New Delhi conference this week that “we will not sit by and let another glut resurface in the coming years and bring the market through the roller coaster that we have seen.”

Thinning inventories isn’t just down to OPEC-led cuts. Oil demand has been growing amid a rare, synchronized economic expansion by the world’s biggest economies. OPEC said it now sees demand for this year growing by about 30,000 barrels a day more than it had previously forecast. That growth is now expected to come to an average 1.63 million barrels a day for the year.

Amid that new appetite, a series of production outages are already sapping supply. Last month, OPEC says it lost about 100,000 barrels a day because of the crisis in Venezuela and disputes by rival political groups in Libya and Iraq.

All that has translated into higher oil prices. Brent, the international oil benchmark, has been hovering above $70 a barrel—levels not seen in three years.

The big question for markets now is whether, amid the tightening market, North American shale producers swing back into action. These smaller, nimbler producers have in previous periods of oil-price strength, ramped up output to take advantage of the higher prices.

That new production typically boosts supply, and eases prices back down again. In its report, OPEC upgraded its non-OPEC oil supply forecast for the year, saying Canada and the U.S. will pump about 90,000 barrels a day more than expected.