OPEC said that the global oil supply surplus has nearly been eliminated, although the group is shifting its sights on lack of investment in upstream supply.
In OPEC’s May Oil Market Report, the group noted that non-OPEC supply continues to grow at a rapid rate, adding 0.87 million barrels per day (mb/d) in 2017, with expectations of another 1.7 mb/d in 2018, 89 percent of which will come from the U.S. In fact, non-OPEC supply is expected to outpace demand growth, even though demand will expand by a robust 1.65 mb/d this year.
But OPEC also warned that “non-OPEC capital expenditure (CAPEX), including exploration, increased by only 2% y-o-y. Moreover, it has seen a decline of around 42% compared to the 2014 level.” While that seems like a bit of a throw-away line given the enormous production increases from U.S. shale, the focus on upstream investment has been a growing point of emphasis for OPEC as it grapples with how to respond to a tightening oil market.
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Commercial stocks were only 9 million barrels above the five-year average in March, which is to say, stocks are probably already below the five-year average at this point. That means that OPEC has achieved its goal of shrinking the supply surplus.
That would suggest that the group begins to unwind the production cuts at its upcoming meeting in June, but there has been a reluctance to do so. Saudi Arabia is aiming for higher oil prices ahead of the IPO of Saudi Aramco, expected at some point in 2019. Related: Iran Sanctions Threaten The Petrodollar
Keeping the cuts in place for the remainder of 2018 (OPEC’s initial preference) would seem to require another justification now that inventories are back to the five-year average. Raising alarms about lack of upstream investment could offer such a pretext.
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