Is Riyadh playing double game? No mess; everyone is happy with oil price

Oil prices are rising ahead of the OPEC Summit to extend output cuts. However, oil reserves are not shrinking as rapidly as it was expected. It’s not just the shale oil that is the problem. According to Reuters, OPEC heavyweights Saudi Arabia and Iraq say they agreed on the need to extend curbs, which will not be implemented, in fact. Brent crude oil prices have overpassed $54 per barrel. Last time, such prices were registered in mid-April. The reason why oil prices are rising is the market, which is waiting for the cartel to extend curbs and Russia to support it. In a joint communique, energy ministers of Russia and Saudi Arabia, Alexander Novak and Khalid al Falih, said output cuts would be extended by nine months, not by six, as it was announced earlier. Riyadh’s representative told Bloomberg the new agreement is supported by all 9 members of OPEC.

Such statements are what prompted oil prices to rise, though Reuters says the situation in the oil market is not that good and demand is not growing as quickly as it was anticipated. “Now, many of oil storage tanks are filling back up or draining more slowly than investors and oil firms had expected, according to global inventory estimates and more than a dozen oil traders and shipping sources,” Reuters reported. “From the Malacca Straits in Asia to the ports of Northern Europe and the Gulf of Mexico, drawdowns of global inventories have slowed or even reversed. In the Amsterdam-Rotterdam-Antwerp (ARA) region – one of the most expensive areas in Europe to store oil and the benchmark pricing point for fuel - crude is starting to flow back into storage because refiners are "clogged" with oil. Refined fuel inventories have also jumped suddenly, with gasoil in tanks in the ARA hub rising to an eight-month high earlier this month, according to Dutch consultancy PJK International. Gasoil includes jet fuel, diesel and heating oil. At one of the world's largest oil storage facilities - on the shores of Saldanha Bay in South Africa - millions of barrels were sold in recent months, traders told Reuters. But more cargoes are flowing right back into its tanks, which can hold 45 million barrels, as sellers struggle to find refiners to buy freshly loaded oil, the traders said,” Reuters writes.

The situation is better in China, the source reports, “In China, the world's second-largest oil consumer behind the United States, commercial crude stocks hit their lowest level in four years in March. But in nearby South Korea, inventories were near a record.”

The current situation, when demand still exceeds supply, made Bank of America to lower its 2017 target for Brent crude by $7 a barrel to $54, last week. With U.S. shale oil production surging, it will be hard to achieve balance in the oil market. The export data published by the Joint Oil Data Initiative (JODI) on May 18 show the Saudis exported 7.23 million bpd in March, slightly up from February's 6.96 million bpd, and down from January's 7.71 million bpd. Actually, comparing to the last three months, output was cut by more than 600,000 pbd, which is by 200,000 more than Riyadh promised to cut. However, according to Reuters, vessel-tracking and port data show a different situation. “This data shows Saudi exports of crude averaged 7.67 million bpd in the first quarter, down only 180,000 bpd from the 7.85 million bpd in the last quarter of 2016,” Reuters says. Hence, Saudi Arabia failed to cut even the promised 400,000 bpd. And Joint Oil Data Initiative (JODI) showing that Riyadh overstripped the output cuts target is not independent and is made by market participants.

To be fair, Reuters says Saudi Arabia cut export of refined products. However, the difference between the first quarter of the current year and the last quarter of 2016 average some 90,000 bpd.

Marsel Salikhov, Head of the Economic Department, the Institute of Energy and Finance, says export data not always can be compared with output data. A short-term effect on oil prices is caused by expectations of the market participants rather than by the real situation in the market. “A dynamic game is currently underway. The major players are testing what influences the market more efficiently: real curbs or statements on the need to cut output. At the end of the last year, they agreed on the need of six-month cuts. And what happened next? Oil price started to fall in 6 months. Therefore, they decided to extend the decision to cut output and that statement again made the price rise,” the expert explains. He is sure that the current prices include the future agreement and the oil price will be ranging between $50-$55 per barrel soon. What will affect the real situation in the market and the supply-demand balance is a growth of demand that average 1 million bpd annually. The U.S. shale oil producers do not anticipate any drastic growth of output.

Igor Yushkov, senior analyst at the National Energy Security Fund and expert at the Russian Government’s Financial University, says the current oil prices meet the interests of all the market participants. “Everyone is happy with the current price and budgets have been reviewed already,” Yushkov says. If Saudi Arabia fails to implement its promises, no one will create a mess around it, the expert says. “What affects the prices now is the information field. They just show that cuts happen. Those who could wipe up a scandal are no longer interested in it and in reduction of oil price either,” Yushkov says. He is sure that the current prices meet the interests of U.S. shale gas producers and traders, whose response affects the stock prices.