The Strategist

Morgan Stanley: OPEC production cuts are just a facade

05/09/2017 - 07:20

The OPEC member countries have switched to hybrid tactics in the struggle for the world oil market. This is stated in Morgan Stanley bank’s latest review, dedicated to the cartel's policy.

Javier Blas
Javier Blas
Formally, the cartel’s members are fulfilling their obligations to reduce production. In January-March, the implementation rate reached 99%, according to the International Energy Agency (IEA). At the same time, supply of OPEC oil to the world market is not decreasing even though the production is declining. There is an evidence that the cartel’s producers keep fighting for their customers and are not going to give up their share to competitors.

According to the IEA, in January-April OPEC production fell by 1.4 million barrels per day, whereas, according to the Joint Organizations Data Initiative (JODI), the cartel’s exports in the reporting period decreased by only 0.9 million barrels per day. Shipment of OPEC oil to tankers for export supplies, in turn, fell by 0.8 million bpd. (data from ClipperData industry provider).

At the same time, in January-March the largest consumers of OPEC oil - the USA, China, Japan, South Korea and Singapore - even increased purchases of raw materials by 1 million barrels per day compared to the previous quarter. Tanker shipments of OPEC oil to ports around the world also increased in January-April by 0.7 million barrels per day, as follows from ClipperData’s information.

The survey notes that the difference between the volumes of OPEC oil loading/export supplies (which are growing) and production (which is declining) indicates that the countries are selling oil from their reserves, in addition to that exported right after extraction. According to the JODI, the level of stocks is decreasing in all countries of the cartel. Nevertheless, aggregate oil and oil products stocks in all countries of the cartel grew 105 million barrels in January-February, as shown in a broadest statistics of the IEA, the US Energy Information Administration, the Chinese agency Xinhua and Thomson Reuters Datastream.

Morgan Stanley’s report expects that reduction in oil reserves in the OPEC countries on average will be 800 thousand barrels per day in 2017. Part of this decline can be explained by the OPEC countries’ quite expected sale of the reserves of oil produced on the world market.

Accordingly, although OPEC countries have reduced production volumes in accordance with the Vienna agreements, the total reduction in OPEC supply of oil to world markets by the end of April 2017 was at least 500 thousand barrels less than it could be in the absence shipments of oil from storages of the cartel’s countries.