Flow Level Pressure

How Are Oil Companies Getting Around OPEC's Cuts?

May 24 2017 Comments 0

Generally, what OPEC says goes. But in the wake of recent self-imposed production cuts, a sly new trend has emerged. In a bid to sidestep the embargo, analysts claim that some OPEC governed companies are sourcing sales from existing storage.

The pattern was noticed when OPEC production cuts failed to drag up global oil prices. Instead, the per barrel price hovered at around US$50 a barrel, which prompted energy traders to point the finger at a culprit that had been previously overlooked - exports.

OPEC slammed for being “disingenuous”

Despite OPEC’s self-imposed production cuts, the organisation’s exports simply don’t reflect the shift. On the contrary, Morgan Stanley analysts maintain that while OPEC has slashed production by as much as 1.4 million barrels a day, shipping data suggests that exports have dropped by less than 1 million barrels per day since the start of the year.

Top consultancy group Energy Aspects shares these suspicions, and warns that the blatant discrepancy between production cuts and export figures positions OPEC as “disingenuous.” The group lowballs Morgan Stanley, and claims that exports could be as low as 800,000 barrels per day. It also shares the view that OPEC members could be substituting oil lost to production cuts with crude drawn from existing storage.

Vienna talks loom

Of course, this won’t go unnoticed. On May 25 OPEC ministers are scheduled to meet in Vienna to discuss whether to prolong the production cut deal that was reached in December. Together with 11 non-members, OPEC agreed to cut output by 1.8 million barrels per day in the first half of 2017. Now, it’s highly likely that these restrictions will be extended for another nine months.

Understandably, there will be tension if OPEC deliberately undermines its self-imposed restrictions by dipping into storage. Energy giants like Russia could pull out of the deal, which would represent a big step backward for OPEC and its efforts to curb the global oil supply glut.

Is “natural variation” a factor?

Despite widespread scepticism, not all analysts are so alarmed. Paul Horsnell, an in-house analyst at Standard Chartered reminds critics that there’s always a “natural variation” between production and export levels.

“A barrel cut of production does not necessarily equate to a barrel immediately out of exports,” he explains. “OPEC cuts play out over quarters while market sentiment plays out over days and weeks.”

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