The role played by oil inventories was once again in the news the last few days.
Saudi Arabia’s oil minister Khalid Al-Falih said Monday that the amount of crude in storage needs to fall before OPEC should consider lifting supply restrictions.
“As long as the levels of inventories are rising and we are far from normal levels, we will stay the course, guiding the market towards balance,” Al-Falih said.
Inventory levels are one of two parameters (along with investment levels) that Saudi Arabia uses to guide its strategy, Al-Falih said this week.
Those are fine measuring sticks, though was Al-Falih correct when he said inventories are rising? What was his source?
Back in early January, when the OPEC-led supply cuts went into effect, we discussed how inventories were an important metric, yet the traditional data sources had problems in terms of geographic scope, timeliness or reliability.
A similar problem exists for estimating OPEC crude production, which we wrote about last month after participating in a London workshop dedicated to finding ways to improve existing techniques (hint: satellites).
Ursa has helped solve this problem by measuring crude storage tanks around the world on a weekly basis using synthetic aperture radar (SAR).
SAR image of storage tanks
Our data actually shows global inventories have fallen by 1.9% so far this year.
That suggests the efforts by OPEC and Russia have been successful, helping to justify the increase in crude prices.
It should be noted that OPEC’s preferred benchmark has been total inventories comprising the 34 countries with OECD membership.
That data is publicly available from the International Energy Agency, which publishes end-month OECD inventories on approximately a six-week lag.
The latest report, published March 15, found that OECD crude inventories rose by ~ 20 million barrels in January.
But what has happened since then?
Our data shows OECD stocks lower mid-March than at the end of 2018, which is noteworthy because these inventories typically build during the first quarter due to seasonal refinery maintenance.
And inventories outside the OECD have also fallen year-to-date.
Some of the locations with the biggest YTD draws are closely tied to OPEC production declines, whether voluntary or involuntary (e.g. Iran, Venezuela).
That list includes Kharg Island (Iran’s biggest export terminal), Sidi Kirir (an Egyptian port and transit point for Persian Gulf supply). Places with significant builds include Cushing, Oklahoma (WTI futures delivery point) and Zhoushan, China.
If you sort by percentage change, sites with smaller capacity get noticed. That list includes the Caribbean ports of St. Eustatius and Sint Nicolaas (home to PDVSA storage tanks), which have experienced sharp draws following the imposition of US sanctions on Venezuela's state-owned oil firm in late January.
Zawiya, Libya saw a large YTD build by percentage, which reflects the restart of El Sharara, Libya's biggest oilfield. (We earlier detected El Sharara coming back online using gas flaring data. Click here to read more).
Falih’s remarks were widely interpreted to convey a message of Saudi commitment to extending the output cuts into the second-half of 2019.
His message, delivered to a scrum of oil reporters gathered in the capital of Azerbaijan, helped lift crude futures to 2019-highs.
We’ll find out what happens when the Joint Ministerial Monitoring Committee meets next June 25-26 in Vienna.
OPEC does not officially target a certain oil price, but it would be naive to suggest producers haven’t been encouraged by the steady increase. ICE Brent has sailed since the end of 2018 from the low-$50s to high-$60s.
Unless crude futures hit demand-destruction levels, what is the likelihood that OPEC will change course?
It’s easy to imagine OPEC oil ministers defending an output cut extension in late June by stating that oil inventories remain bloated, an assertion taken at face value.
The ability to make unchecked statements won’t last much longer as the transparency provided by satellite imagery increases awareness around production and storage levels.
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