OPEC's effort appears to have made a noticeable dent in the supply glut that had been driving crude oil prices lower in recent years.
OPEC’s effort appears to have made a noticeable dent in the supply glut that had been driving crude oil prices lower in recent years.

The latest report from the International Energy Agency on the state of the global oil market includes a few select lines that should now be very familiar to anyone following the situation in recent years. After many months of back and forth, the IEA is of the opinion that the much-discussed, widely sought-after “re-balancing” event between oil’s supply and market demand is within reach. The report analyzed the most recent data available (from January 2017, in this case) to make its conclusion.

“It can be argued confidently that the market is already very close to balance, and as more data becomes available this will become clearer,” the IEA report said. “We have an interesting second half to come.”

That “second half” is in reference to OPEC’s pledge to reduce its total oil output figures that began in October 2016. Since the initial agreement between producers was slated for one year, April marked the halfway point at which analysts may assess the effects of the cut.

For now, OPEC’s effort appears to have made a noticeable dent in the supply glut that had been driving crude oil prices lower in recent years. This is especially true now that other nations outside of OPEC are also cooperating with the organization’s goal to stanch the flow of international oil supplies and increase prices. Between OPEC and non-OPEC oil exporting countries, total output was slashed by more than 1.8 million barrels of oil per day in March, slightly more than OPEC’s target, according to Bloomberg.

These numbers prove OPEC’s plan is finally working to restrict oil supplies. But as far as achieving its ultimate objective of making oil production more profitable for its member nations, the cartel doesn’t have much to show. Oil prices have only recently recovered to their year-to-date peak around $53 per barrel, while future demand projections remain uncertain.

OPEC cuts have limited effect

To explain why OPEC’s production cuts might not be working like a charm, Bloomberg’s Julian Lee examined recent oil inventory reports to get another perspective on the situation.

On the one hand, the IEA reported that inventories in a variety of forms and throughout different locations were dropping:

  • The volume of oil held in tankers, the most expensive form of storage for producers, dropped substantially in the first quarter of 2017.
  • U.S. crude inventories fell by 2.2 million barrels in the first week of April, the first sizable reduction in stockpiles recorded this year.
  • Commercial storage facilities in major hubs like the Caribbean and South Africa are also posting lower levels of product.

This all adds up to an IEA estimate of 200,000 barrels per day being cut from global inventories. But in looking at oil stockpiles actually observed, the IEA reported some stocks might have actually increased in the first quarter. Bloomberg’s Lee pointed out that readers aren’t alone in their confusion over this situation – by some measures, supplies are actually increasing even though oil field output is falling.

OPEC’s own monthly report ended up being even less hopeful than the IEA, estimating that global inventories increased by 430,000 barrels in Q1 2017. The takeaway is that OPEC is actually less optimistic on profitable oil production in 2017 than the IEA, at least regarding the second quarter. OPEC believes supply will continue to outweigh demand in the first half of the year, while the IEA seems to expect demand to just barely edge out supply.

While the two groups may hold seemingly competing views on their outlook for the next few months, they do both agree that by the third quarter, global demand will finally make a sizable dent in overflowing stockpiles. The only caveat here is a big one: OPEC and its partners will need to extend their cut beyond the one-year mark to make this happen. Bloomberg’s Lee explained that while several have taken the opportunity to perform maintenance in order to meet production limits, such an easy out may be much harder to come by later in the year.