OPEC could be just weeks away from claiming success in rebalancing the global oil markets, the International Energy Agency said Friday, as robust oil demand growth and falling output from key producers drains stock levels faster than expected.

  • OPEC close to ‘mission accomplished’ on cuts
  • OPEC five-year stock metric under spotlight
  • Maintains 2018 oil demand growth forecast

OECD oil stocks fell by a larger-than-normal 25.6 million barrels in February to within just 30 million barrels of their five-year average, the key metric to gage the success of OPEC-led output cuts, the IEA said in its latest monthly oil market report.

OECD oil stocks have now fallen for six of the last seven months and have declined sharply versus their five-year average, the key metric being used by OPEC to measure the success of its output cuts.

Speculating as to whether the OPEC-led output deal has now achieved its goal, the IEA said that OECD oil stocks, which are expected to continue drawing if the current cuts hold, will likely reach or even fall below the five-year average target in April or May.

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“It is not for us to declare on behalf of the Vienna agreement countries that it is ‘mission accomplished’, but if our outlook is accurate, it certainly looks very much like it,” the IEA said.

OECD commercial oil stocks declined by 25.6 million barrels month-on-month in February to 2.84 billion barrels, the IEA estimated, the lowest level since April 2015. Preliminary data for March is mixed, the IEA said, with US stocks falling a further 17 million barrels on the month but higher crude stocks in Europe and Japan.

The report from the Paris-based energy watchdog comes a day after OPEC forecast that global crude stocks will be significantly reduced in the second half of the year, with oil supply falling short of demand by almost 1.3 million b/d.

OPEC itself estimates OECD oil stocks currently stand at 43 million barrels above the five-year average.

OPEC OUTPUT SLIPPING

On supply, the IEA said world oil production slipped by 120,000 b/d to 97.8 million b/d during March, after the OPEC-led oil producers cut output by 2.4 million b/d, significantly more than their pledged 1.7 million b/d.

Confirming estimates by S&P Global Platts, the IEA said a third of the March cuts came as a result of intentional reductions from Venezuela and Mexico, which have lost a combined 890,000 b/d versus the October 2016 baseline.

The IEA said that scheduled maintenance, unplanned declines and tighter supply discipline cut OPEC crude oil production by 200,000 b/d in March to 31.83 million b/d.

“Losses from Venezuela helped push OPEC crude output to the lowest level in nearly three years and raised (the OPEC cut) compliance to an eye-popping 163%,” the IEA said.

OPEC on Thursday blamed lower production in Angola, Venezuela, Algeria and Saudi Arabia for shrinking the group’s crude production in March to 31.96 million b/d, a fall of 200,000 b/d.

The IEA left its outlook for non-OPEC growth this year unchanged at 1.8 million b/d, sticking to its view that US crude production will increase by 1.3 million b/d versus 2017 led by a shale oil recover.

NEW METRIC?

With global oil demand growth robust and sliding recent OPEC production draining the oil stock glut sooner than expected, market watchers have been focused on whether OPEC will look to adjust its metric for rebalancing the oil markets when it next meets in June.

“OPEC is within rapid reach of its first announced goals and will have to come up with a new metric for the June meeting if it wants the agreement to last into the second half of the year,” Petromatrix’s Olivier Jakob said in a note Friday.

Indeed, the IEA noted that, expressed on a days of forward demand basis, OECD oil stocks have already been below the five-year average since January this year.

It estimated that, if OPEC’s stock level metric were widened to the 10-year average, the surplus would increase to 108 million barrels in February, a level that would “likely take several more months to draw down.”

Analysts at Tudor, Pickering and Holt said the IEA’s latest stock figures imply that the oil market remains 600,000 b/d undersupplied.

“Expect the undersupply to remain through a summer time horizon as Saudi rhetoric continues to point to higher oil price,” the bank said in a note.

TRADE WAR SCENARIO

In terms of demand, the IEA said it still expects global oil demand to grow by 1.5 million b/d to 99.3 million b/d this year, after an upward revision to the US demand picture was largely offset by a downward adjustment for China.

OECD oil demand during Q1 was revised up by 315,000 b/d, due to cold weather in the US and the start-up of a petrochemical project, while non-OECD demand in the quarter was revised down by 260,000 b/d due to weak Chinese data, the IEA said.

OPEC‘s own demand forecast this year is more bullish. On Thursday the producer group increased its own oil demand growth estimate for this year by 30,000 b/d to 1.63 million b/d.

The IEA said that, while the current economic outlook remains supportive of demand with strong OECD growth data, the ongoing trade dispute between the US and China is “introducing a downward risk to the forecast.”

Under a scenario where global GDP growth is cut by 1% due to widespread rising trade tariffs, global oil demand growth would be reduced by roughly 690,000 b/d, the IEA estimated.

“Oil demand would suffer the direct impact of lower bunker consumption and lower inland transportation of traded goods, reducing fuel oil and diesel use,” it said.

–Robert Perkins, robert.perkins@spglobal.com
–Edited by James Leech, newsdesk@spglobal.com

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