LONDON Reported oil stocks have fallen much more slowly than OPEC anticipated at the beginning of the year, leading to scepticism about the effectiveness of the organization's production cuts.
But the sluggish response may reflect the repositioning of formerly uncounted stocks to more visible locations rather than a failure to adjust the supply-demand balance.
In general, crude oil and refined products move down the supply chain from areas of net production to areas of net consumption.
Despite significant trading activity around particular cargoes, the movement of crude and products essentially occurs in only one direction.
For commercial reasons, it makes no sense to move crude and products back up the supply chain, away from consumers and back toward refiners and producers.
Crude and products stocks are positioned as close to refiners and final consumers as possible, subject to the availability and cost of storage.
OPEC ministers and officials have stated that the objective of production cuts is to eliminate the overhang of excess oil stocks and reduce inventories to the five-year average level.
Ministers and officials most often reference commercial crude and product stocks held in OECD member countries when talking about the overhang and market rebalancing.
OECD stocks are the most accurately and frequently reported so in some ways it makes sense to use them as the benchmark for assessing whether the production cuts are working.
The problem is that they are not necessarily representative of stockpiles held in producing and consuming countries outside the OECD.
According to the International Energy Agency, total OECD commercial stocks rose during the first quarter of 2017, but this was largely offset by a reduction in floating storage and stocks held outside the OECD ("Oil Market Report", IEA, May 2017).
The diverging behavior of OECD and non-OECD oil stocks reflects their differing locations along the oil industry's supply chain.
While OECD countries are substantial net importers of crude and consumers of refined products most of the major oil-exporting countries are located outside the OECD.
OECD refining centers also contain lots of inexpensive storage options which make them the preferred choice for holding non-operational or speculative inventories.
The result is that storage tanks in the OECD tend to be the first to fill during a period of oversupply and the last to empty when global stocks are falling.
By targeting OECD stocks, OPEC has made achieving its objective harder in the short term, because these stocks will be the last to respond to its production policy.
There is some evidence excess global inventories have already fallen, with reductions in oil-exporting countries, floating storage and remote locations part way between producing and consuming centers.
Excess stocks are gradually being pulled along the supply chain from producers, floating storage and remote locations toward the major refining centers in the OECD.
But the behavior of the supply chain introduces an important non-linearity into the response of OECD stocks to OPEC's production policy.
OECD stocks are likely to fall slowly at first, then accelerate once producer stocks and floating storage have been emptied.
As a result, OPEC's production policy often tends to appear relatively ineffective at first before gaining traction later.
In this instance, the stubbornly high level of OECD oil inventories during the first quarter of 2017 may have masked a broader tightening in the supply-demand-inventory balance.
Inventory movements coupled with stronger seasonal consumption during the northern hemisphere summer could result in a more pronounced decline in OECD stocks during the second and third quarters.
(John Kemp is a Reuters market analyst. The views expressed are his own)
(Editing by David Evans)