Those inventory figures, however, did not fully capture what was happening in Asia where there was quite a lot of crude that had been put into storage. “If you look at China, for example, they are refining a lot more crude than they actually need, so inventories are going up there,” Begg said.

OPEC+ is under pressure to manage market expectations, but will likely indicate at Vienna that its response will come later, when supplies tighten further, he said.

As OPEC and Russia are producing significantly less oil than intended by the cuts agreement — and less than the market needs — thanks to production outages in Venezuela, observers agree that output could easily be expanded by Saudi Arabia, Russia, Kuwait and others.

“That would rebalance the oil market, driving Brent down to $65 by year’s end,” according to a Commerz-bank circular on May 21.

Comments from Saudi and Russian ministers at a recent energy forum in St. Petersburg have put pay to soaring prices with Brent plunging by more than 6 percent to $75 per barrel within days.

Still, compared to where we were, this looks like a suppliers market by any other name.

“Yes, but we think the Saudis will be more focused on preventing a really big price spike than they are on limiting or stopping prices at $75, $80 or $85, we don’t think they are concerned at the moment,” said Mallinson.
“What worries the Saudis is a massive price hike that could see crude smash through the $100 barrier.”

If that happened, he said, it could have a damaging impact on the global economy and this was not lost on OPEC and Russia. Price stability was viewed as critical for longer term demand for oil and a big spike would undermine their claims to be responsible participants, able to manage both the downside and upside of the price cycle.

Mallinson said the lurking danger was that another upward surge in the price would boost technological advances and energy efficiency gains, bolster consumer purchases of electric vehicles, and accelerate rapid shifts to alternative technologies and fuels.

Neil Atkinson, head of oil industry and markets at the International Energy Agency, said Venezuela’s production could fall by the end of this year by another several hundred thousand barrels a day, given the degradation of the oil industry there. “And that is a prognosis that is quite widely accepted,” he said.

Then factor in probable Iranian losses. “If for the sake of argument, Iranian barrels fell by about 1 million barrels a day like last time around, combined with the Venezuelan collapse, you are in a situation where unless there are compensatory increases from elsewhere, the market could tighten very rapidly. Indeed, the market is already tightening today,” said Atkinson.

US shale production is rising significantly, with the IEA forecasting an extra 1.3 million barrels per day more in 2018 compared with 2017.

“To some extent, US supply is held back by bottlenecks, but not significantly. “But US production by itself was never going to be enough to plug gaps left by Iran and Venezuela.”

Atkinson said: “Maybe at the next OPEC meeting, they will formalize some sort of relaxation of the agreement, by some given volume, at some given time. But I don’t think the intention is for prices to rise significantly above where they are today, because at that point there is the risk of ‘demand destruction.’”

Whether action will take crude down to $60 or $75 is anyone’s guess.

Mallinson believes we are no longer in the mantra of “lower for longer.”

And there is a bigger point to be made, he suggested. It’s now clear there is more influence in OPEC’s hands than some had been claiming.

“Remember a couple of years ago they were writing off the group as irrelevant, because of US shale … because people thought oversupply would last forever. Now, OPEC is back in the spotlight, it has some difficult challenges ahead. But, together with Russia, it has reconfirmed it has influence in the market.

“The big overhang is done. But the fact that OPEC members are not doing a victory dance indicates they don’t see the job as yet finished,” he said.

 /  Source: arabnews