(Bloomberg) — OPEC officials this week hailed the “ excellent” and “ unprecedented” implementation of their agreement to cut oil production, but were still waiting for solid evidence that the deal was fulfilling their key measure of success and shrinking the global glut.
A reduction in the amount of oil held in storage around the world is the most important factor for the Organization of Petroleum Exporting Countries, Qatar’s Energy Minister Mohammed Al Sada said at the IP Week conference in London Wednesday. The pace of that decline will determine the group’s next move, including whether to extend the accord beyond its initial six-month term, said OPEC Secretary-General Mohammad Barkindo.
The most reliable data available so far on inventories — crude held in commercial storage in the U.S. — is going in the opposite direction. Stockpiles in the world’s largest oil consumer have risen every week since OPEC began cutting on Jan. 1, while data on global storage levels has yet to be published.
“The market has been positively surprised by the high levels of compliance to this deal,” Jens Pedersen, senior analyst at Danske Bank A/S, said by phone. “The trend in inventories recently has been upwards and quite relentless. The market will be a bit careful to rally further if inventories are still building.”
Brent crude has risen more than 20% since OPEC agreed last year to cut production, a deal that was joined later by Russia, Mexico and several other non-members. Even as the group’s initial compliance with the accord exceeded expectations, the price rally stalled in the mid-$50s as U.S. crude stockpiles surged to the highest level in more than three decades and oil drillers deployed the most rigs since October 2015. Brent fell 1.6% to $55.73 a barrel at 4:56 p.m. in London Wednesday.
A five-nation technical committee meeting in Vienna on Wednesday concluded that OPEC had achieved more than 90% of its promised cutbacks in January, and that the group’s partners implemented almost 60%, according to delegates familiar with the matter who asked not to be identified.
The OPEC agreement is working, compliance will increase to 100% and oil inventories will drop this year, Barkindo said.
“We are going to go for much higher levels of compliance because of the very high level of stocks that we have brought over with us from 2016,” Barkindo said in a Bloomberg Television interview in London on Tuesday. Oil is still far from an “equilibrium price” and inventories remained very high in January, but OPEC’s not disappointed by the market reaction to its agreement.
U.S. crude inventories have expanded by more than 39 million barrels this year to 518 million, the highest level in data going back to August 1982, according to the Energy Information Administration. A further 3.25 million barrels were added last week, according to a Bloomberg survey before government data to be published Thursday.
That’s only a partial picture of the state of global oil supply, but the International Energy Agency has yet to publish an estimate of how the first month of OPEC cuts affected international inventories.
Stocks held in rich industrialized countries — including the U.S. — were falling through the fourth quarter of 2016 and dropped below 3 billion barrels in December for the first time in a year. Meanwhile, stockpiles in China and other emerging economies, plus volumes of fuel held at sea were still growing, the IEA said on Feb. 10.
While solid supply data may be lacking, changes in benchmark oil prices do suggest OPEC is succeeding. A pricing structure in Brent and West Texas Intermediate futures called contango — an indicator of oversupply where short-term prices are lower than long-term — is weakening and shifting toward the opposite condition known as backwardation — a sign of tighter supply.
Global oil stockpiles are starting to decline, but it’s “truly premature” to say whether OPEC will extend its output cuts into the second half, Qatar’s Al Sada said in a Bloomberg Television interview in London.
Patrick Pouyanne, chief executive officer of French oil and gas producer Total SA, said OPEC needs to do more if it really wants to eliminate the glut.
“If they want really to have an impact on the market, which means to have the inventories going down because inventories are quite high, it will have to be extended,” Pouyanne said Tuesday in a Bloomberg Television interview in New York. “I’m convinced that they will do it.”
Bloomberg News by Grant Smith and Alex Longley