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Highlights

Five-year average stock metric under spotlight

2010-2014 stocks some 214 million barrels lower

US infrastructure boom upends stocks rationale

London — OPEC is dusting off plans for a new metric to measure the success of its ongoing output cuts, but the main option on the table -- targeting lower stocks -- means the group would need much deeper and longer curbs to rebalance the global oil market.

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From their inception in late 2016, the OPEC-led production cuts have targeted a return to the five-year average of oil and refined product stocks in OECD member countries. Following years of stock builds under OPEC's former pump-at-will strategy, OECD oil stocks hit a record of more than 400 million barrels in mid-2016.

OPEC hit its target in March 2018, according to the International Energy Agency, but despite a brief return to near four-year highs of over $86/b in October, firmer oil prices have failed to stick.

Comments from OPEC ministers in Vienna this week show the group is now keen to adjust its target to take account of the creep in global oil stock capacity over recent years to instead focus on the five-year average for 2010-2014.

Compared to the five-year average from 2014-2018, the 2010-2014 OECD oil stock average is 214 million barrels lower, or some 7.5% of the total 2.89 trillion barrels stock levels, IEA data shows.

With OPEC pumping at around 30 million b/d, and assuming no further significant output falls from Iran and Venezuela, larger or longer cuts would be needed to reach that level by the time OPEC's current deal expires in March 2020, market watchers note.

"For that target, OPEC at current levels of production will have to wait for a very, very, very long time or will have to cut production much more aggressively," Petromatrix's Olivier Jakob said in a note Wednesday.

Indeed, reducing OECD oil stocks by a further 214 million barrels under a new target over the next nine months would require an additional oil supply reduction of some 800,000 b/d, a major ramp-up from OPEC's current 1.2 million b/d cut agreement.

OECD industry oil stocks

DAYS OF OIL DEMAND COVER

Total supply from OPEC and its producer allies, however, would likely include falling volumes from Iran and Venezuela, which are shrinking OPEC+ production by more than the official cut target agreed.

Combined output from the wider OPEC-led group has fallen by over 3 million b/d since last November, according to S&P Global Platts estimates of OPEC production and IEA data on non-OPEC cuts.

OPEC's move to adjust the success metric of its output policy is not new. During 2018, some members voiced concerns that the five-year average stock target was being distorted by the excessively high stock levels in recent years. Since 2014, rising global oil consumption and the growth of oil pipeline infrastructure has also inflated the stock figures.

Some OPEC price hawks have suggested the measure should be changed to reflect demand growth, a move which could justify greater output curbs. Speaking in Vienna on Monday, Russia's energy minster Alexander Novak pointed to the fact that demand has grown significantly since 2014, a factor that should be taken into consideration for a new metric.

Expressed in days of forward demand, global oil stocks under the most recent five-year average stand 3.7 days above the 2010-2014 average of 57.8 days, according to IEA data.

Without linking OECD oil stock levels to demand cover, a key part of the utility of the stock measures is missed, notes UBS oil analyst Giovanni Staunovo.

"The OECD five-year oil inventory average is a flawed benchmark: it excludes emerging markets where demand rises faster than in OECD countries," Staunovo said. "The absolute metrics of OECD levels excludes that global oil demand is 5 million b/d higher than back in 2015."

Even if OPEC moves to target 2010-2014 OECD stock levels, the resulting supply constraint may still not be enough to tighten the key Atlantic Basin crude market, some market watchers believe. The main spoiler is that the US -- in the wake of the shale boom -- is now much less dependent on crude stocks due to the rapid expansion of its pipeline infrastructure, according to Petromatrix.

"Crude oil stocks were needed when the crude was arriving on long-haul VLCCs to the US but much less stocks are needed when that is replaced by continuous pipeline flows," Jakob said. "Furthermore, as the US slowly comes closer to becoming a net oil exporter, its strategic stocks obligations are sharply reduced and pressure will increase to reduce the SPR."

Jakob estimates that, based on OPEC's current output, global oil stocks would build in 2020 and the potential stock draws in the second half of this year would still be insufficient to bring stocks back to a target of 2010-2014 levels.

OECD oil stocks in demand days

NEAR TERM TIGHTNESS

Speaking in Vienna on Tuesday, Saudi oil minister Khalid al-Falih said a switch to the lower 2010-2014 stock metric was just one option being considered.

"We will be looking at a spectrum of metrics to tell us what to do next once the nine months are over," he said referring to the current output deal, which now expires in March 2020.

"When we meet in September... we are going to see where this inventory data is actually useable... so we are going to look much deeper into inventories," he said.

In the near term, however, S&P Global Platts Analytics continues to expect Brent prices are heading to $70-$80/b by year-end, supported in part by higher demand and crude stock draws with the return of refineries from maintenance.

"The nine-month rollover of the current cut agreement... points to greater likelihood that we will see periods of tightness between now and end-Q1 2020, as OPEC+ will be in wait-and-see mode for longer," S&P Global Analytics' Shin Kim said in a note.

-- Robert Perkins, robert.perkins@spglobal.com

-- Edited by Alisdair Bowles, alisdair.bowles@spglobal.com