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OPEC report lays out need for patience on oil market rebalancing


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London — OPEC and its allies may have to grin and bear it for a few months longer, as the recent run-up in prices - due in large part to their own production cuts -- looks likely to set back their efforts to rebalance the oil market, at least through the first half of the year.

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"Higher oil prices are bringing more supply to the market, particularly in North America and specifically tight oil," OPEC said Thursday in its closely watched oil market report, revising upwards its projection of 2018 non-OPEC output growth by 121,000 b/d from last month's forecast.

Related article: S&P Global Platts OPEC survey

The upshot? Likely a return to a supply glut in the first half of the year, but then a significant tightening in the back half as seasonal demand picks up - as long as OPEC and its 10 non-OPEC partners maintain their production discipline, which is a big if.

The report comes as ministers on a six-country OPEC/non-OPEC monitoring committee are scheduled to meet Sunday in Oman to discuss their 1.8 million b/d supply cut agreement.

With oil prices having risen 10% since OPEC's last meeting November 30 in Vienna, when the agreement was renewed through the end of 2018, many market watchers will be eager to see if the monitoring committee -- co-chaired by Saudi Energy Minister Khalid al-Falih and Russian Energy Minister Alexander Novak -- gives any signal on whether the pact will be ended early or perhaps adjusted.

Iranian oil minister Bijan Zanganeh, who does not sit on the committee, fueled some of the speculation when he said last week that OPEC was not eager for prices to rise too far above $60/b for fear of reigniting US shale supplies, while Lukoil CEO Vagit Alekperov said the cuts should be phased out if oil is $70/b.

ICE Brent futures were trading at $69.04/b Thursday afternoon and have hovered near three-year highs in recent days.

"I think that the committee will have some hard choices in the months ahead," said Michael Cohen, head of energy commodities research at Barclays. "History shows that they ought to be prone to caution, and I would expect that to be the case for the next couple months and in June, or else they will begin to sacrifice their long-term revenues in favor of the short term."

Most ministers have to date rejected any premature end to the cuts, saying the market was still not close to balanced, and indeed, OPEC's report Thursday said inventories of oil in storage remain bloated, some 133 million barrels over the targeted five-year average.

An OPEC source told S&P Global Platts that the monitoring committee's agenda does not include any discussion on any exit strategy.

"My expectation is a smooth meeting," the source said on condition of anonymity.

Still, comments from ministers and delegates over the weekend are sure to be closely parsed, particularly with record high net long positions in oil futures built over recent weeks.

A technical committee of delegates from member countries will meet Saturday in Muscat to review market conditions, before a ministerial dinner Saturday night and the formal monitoring committee meeting Sunday morning.

"A too early indication of a policy change could trigger a liquidation of record high speculative positions [as] markets would start to anticipate more OPEC crude," said Giovanni Staunovo, an oil market analyst with UBS.

Chris Midgley, S&P Global Platts' global director of analytics, said the OPEC/non-OPEC coalition's danger is in over-tightening the market by keeping the cuts on for too long, and that OPEC's estimates of the global stock overhang are far too high.

But in the absence of clearer data, the producer group is likely to keep the status quo on their output cuts.

"The reality is that OPEC has little spare capacity to offer, and I think this will make them reluctant to change course right now," Midgley said.


In its monthly report Thursday, OPEC's analysis arm forecast that global demand for OPEC crude in 2018 will remain well higher than its current production.

The so-called call on OPEC crude for 2018 will average 33.09 million b/d, the report stated, meaning that if OPEC keeps its production steady, oil inventories would need to be drawn to meet demand.

But those stock draws are not forecast until the third quarter at the earliest, with stock builds likely in the first quarter.

Demand for OPEC crude will average merely 31.89 million b/d in Q1, rising to 32.53 million b/d in Q2 and 34.00 million b/d in Q3, before falling slightly to 33.91 million b/d in Q4, the report estimated.

OPEC members produced 32.42 million b/d in December, according to secondary source estimates.

Economically ravaged Venezuela's poor production outlook may benefit OPEC in its rebalancing efforts.

The country self-reported to OPEC that its crude production plunged by 216,300 b/d in December from the previous month to average 1.621 million b/d -- the lowest level in decades -- and many analysts say the prospects are dim for any quick turnaround.

Venezuela "is a story to watch throughout 2018," independent oil analyst Cornelia Meyer said.

Production from outside OPEC also bears watching.

OPEC forecast that non-OPEC supply will average 58.94 million b/d in 2018, an increase of 1.15 million b/d from 2017 and a 121,000 b/d increase from last month's report.

US production growth accounts for virtually all of the increase, the report estimated, with the country expected to average 10.09 million b/d of crude output in 2018, up from 9.27 million b/d in 2017.

"The US remains the key driver of non-OPEC supply growth," the report said.

OPEC projected that global demand for crude in 2018 would average 98.51 million b/d, an increase of 1.53 million b/d over 2017 levels and largely unchanged from last month's report.

The OPEC NGL forecast is also unchanged from last month's report at 6.49 million b/d for 2018.

--Herman Wang,
--Edited by Jonathan Fox,