OPEC’s new strategy to balance the oil market is to cut oil exports to the U.S., a move intended to drain near-record-high crude oil inventories. OPEC originally thought that six months of combined production cuts would be sufficient to balance the oil market, but the market still looks oversupplied.
The IEA has argued that we probably have already reached “balance,” which is to say, demand has caught up withsupply. The energy agency says that the market is moving into a supply deficit situation in the second half of this year, if it hasn’t already. The problem is that the one metric that OPEC officials themselves have held up as the key barometer to watch is the level of global crude oil inventories, rather than the immediate supply/demand balance. On that front, they shot themselves in the foot by ramping up exports just ahead of the implementation of the cuts late last year.
Elevated exports in November and December meant that huge volumes of oil started reaching U.S. shores in January. It is no wonder that U.S. inventories surged in the first quarter. The flood of oil set back OPEC’s efforts right off the bat, and even near 100-percent compliance on the production cuts was not enough to drain inventories at the speed needed to declare victory by June. In a global marketplace, why does it really matter where the Saudis send their oil? In terms of global supply, a barrel sent to Asia is the same as a barrel exported to the U.S., so what’s the point of targeting the U.S., specifically? The logic is that the U.S. has nearly real-time data on crude oil storage, unlike most other places in the world – data that is publicly available. Some analysts believe that oil inventories have been falling around the world for quite a while even as they climbed in the U.S., but because the markets pay close attention to U.S. data, the increase in U.S. inventories in the first quarter weighed on sentiment and prices. After all, nobody really knows what is going on with storage levels in China, for example. Traders should expect a sideways market for the summer months, and look for a pick me up going into the fall. I think it’s a great time to sell options and collect premium during the summer months.
Jul ’17 Crude Light Daily Chart