Global oil stocks are at "worrisome" levels as waning OPEC+ spare capacity is expected to reach an alarming degree by next year amid higher crude demand outstripping supply, the head of Vitol Asia said on Feb. 6.
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OPEC+, which has been increasing its oil production quota by 400,000 b/d per month since August, is struggling to meet these ceiling levels and that will only compound the supply-demand problem, given that the US oil production capacity has yet to hit pre-pandemic figures, Muller added.
"We are still nowhere near the peak we saw pre-pandemic in terms of US production capacity and the spare capacity in OPEC+ is really down to two and half to three members now and month after month the 400,000 b/d that has been put on in the market is actually in effect a much, much smaller number than that," said Muller.
"We can debate whether somewhere in the second half of this year or sometime next year OPEC+ spare capacity reaches levels that are considered alarming and so much so that debate has swung to how soon we need Iranian supply to help alleviate the situation or whether there is a need for more SPR [releases]."
Iranian crude comeback
Fears over the 23-member coalition's waning spare capacity could push oil prices to an even steeper rally after breaking a seven-year high of $90/b on concerns of tight supply and geopolitical market risks. OPEC and its allies on Feb. 2 decided to persist with another modest 400,000 b/d hike in crude production quotas for March. S&P Global Platts assessed Dated Brent on Feb.4 at $97.66/b. up by 4.5% on the day.
The 19 OPEC+ countries with quotas underperformed their production targets by 832,000 b/d in December, according to an analysis prepared for the group's technical committee and seen by Platts. If this trend persists, the oil market is likely to swiftly move into deficit and push oil prices even higher at a time of soaring inflation.
Although the US released oil from its strategic petroleum reserves last year, the move was "a small event," according to Muller.
The world needs Iranian crude to temper the oil price rally and cater to increasing demand, and the only questions will be when, which is likely to be in the second half of this year, and by how much, which is likely to start with floating oil and condensate storage, he added.
"Without exception every investment banker, every advisory consultant, every oil major they all have a view that Iranian oil will be back this year," said Muller.
Chinese oil demand
Even China will need more oil, despite some doubts about demand in the world's second biggest oil consumer, he said. As more refineries come on stream in China and inventories require restocking, Chinese demand will stay strong, he added.
"I think it's fair to state that China is at bare minimum of operating levels in terms of the prescribed levels of mandatory stockholding that state-owned enterprises are meant to hold," said Muller.
"All eyes are on what happens in China after the Chinese New Year because there is a feeling that some restocking will be required. I don't think China is as price sensitive as South Asian nations are."
Against this backdrop of higher demand, tight market supply and skyrocketing crude prices, Saudi Aramco decided to hike March official selling prices across Asia, Europe and the US, with the biggest increases for grades to Northwest Europe and the Mediterranean. This decision came as no surprise to the market, according to Muller.
"You saw a very chunky increase in the Western Hemisphere which is basically Aramco saying we can find enough demand in Asia, which is a higher price market anyway," he said. "It's got to be up because month-on -month we have a massive increase in backwardation and the backwardation feeds into differentials and OSPs in a very logical manner."