The global oil market is rebalancing at an accelerating rate, according to the International Energy Agency (IEA). For OPEC and the eleven other petrostates that have been cutting their collective production through the first half of this year, that could be seen as a sign that their plan to reduce the oversupply in the market is working. But as the Wall Street Journal reports, a closer look at the IEA’s monthly oil market report describes a more unsettling scene for these major producers:
[The] IEA—a global energy adviser for governments—warned Tuesday that more work may have to be done, implying longer cuts are needed to drain excess inventories. In the run up to the cuts, OPEC pumped so much oil that storage levels rose, delaying the rebalancing.
Even if the OPEC and non-OPEC cuts are extended into the second half of 2017, the IEA said, “stocks at the end of 2017 might not have fallen to the five-year average, suggesting that much work remains to be done in the second half of 2017 to drain them further.”
We noted last October that OPEC was playing a savvy and somewhat disingenuous game ahead of its meeting to moot output cuts: by significantly upping its total production in the latter half of last year, it was making the task of then reducing that production in 2017 a whole lot easier.
At the same time, however, that decision has diluted the effect of these cuts, so it’s perhaps no great surprise that oil prices have had such a tepid rebound, just as it might be expected that these petrostates will need to continue to adhere to this strategy for many more months if they want to erase the oversupply (Russia and Saudi Arabia have already said they’ll be cutting through March of next year).
Meanwhile, the United States continues to take advantage of this ceding of market share as shale producers emerge as the big winners from this petrostate production cut.