The One Indicator OPEC Must Watch
Aiding in OPEC’s effort is that the definition of “average” is constantly changing. With each passing day, the previous five years is increasingly made up of periods of time in which the oil market was in a glut. So, the “average” level for oil inventories today is a lot higher than it was three years ago. That means OPEC could achieve its objective with a lot more ease than if the target level was a fixed figure.
Demand is growing strongly, which will help soak up excess barrels as we head into next year. The supply picture is mixed, however. There is rising production in the U.S., Canada, Brazil and some other non-OPEC countries. On the other hand, OPEC countries will keep their output in check, and the inclusion of Nigeria and Libya under the cap will keep supply off the market. And Venezuela’s production will continue to fall.
Although estimates vary, the IEA sees the supply surplus returning - in the first quarter of 2018, the energy agency sees a glut of 0.6 mb/d. In other words, inventories could swell for a period of time, although OPEC is not as pessimistic. But both agree that by mid-year, the drawdowns will really pick up pace, and the objective of “balancing” the market will draw near.
That makes the review period for OPEC’s production limits in June very important. At that point, OPEC and non-OPEC countries will have to come up with an exit strategy.
“The outlook for when we will hit the balanced market will be clearer in June, and we will start thinking of what we will do in 2019,” al-Falih told reporters on Monday.
“The intent is not overnight to open the taps and flood the market.”