Kemp: Milestones On The Oil Market's Road To Rebalancing

Kemp: Milestones On The Oil Market's Road To Rebalancing
Crude oil stockpiles are expected to empty significantly during the third quarter as continued production restraint from OPEC interacts with the seasonal increase in consumption.

Reuters

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LONDON, Feb 14 (Reuters) - Crude oil stockpiles are expected to empty significantly during the third quarter as continued production restraint from OPEC interacts with the seasonal increase in consumption.

OPEC and non-OPEC countries are committed to reducing production by an average of nearly 1.8 million barrels per day in the first six months of 2017, with an option to extend cuts for a further six months.

Production assessments by independent agencies suggest compliance with the agreement has so far been high from OPEC especially from Saudi Arabia and its allies.

Further reductions from non-OPEC could be phased in over the next few months, with Russia in particular committed to increase its production cuts progressively during the compliance period.

Set against this is the risk of "compliance fatigue" if OPEC and non-OPEC countries become complacent and allow production to rise towards the end of the period.

Past experience suggests compliance tends to weaken over time as prices rise and the panic which made an agreement possible in the first place fades.

To preserve their flexibility, OPEC and non-OPEC countries have declined to commit themselves on whether the agreements will be extended.

But the consensus within the crude market seems to be that the cuts will be continued for a further six months, at least in modified form.

The alternative would be to flood the market with more 1 million barrels of extra crude from the start of July which would likely increase stockpiles again.

Assuming production cuts are extended in some form, the biggest impact is likely to come during the three months from July to September.

U.S. refineries normally increase their crude consumption sharply during the third quarter to meet strong demand from motorists during the summer driving season.

Over the last decade, net crude inputs into U.S. refineries have risen by an average of 840,000 barrels per day in the third quarter compared with the first.

The third quarter is also when Saudi Arabia and Iraq increase their own internal consumption of crude to meet air-conditioning demand.


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