NEW YORK (Reuters) - The energy industry scrutinizes U.S. oil stockpile data every week for evidence that OPEC supply cuts are ending a global crude glut, but growing domestic output means the world’s largest oil consumer may be the last place to feel the cuts.
Stubbornly high U.S. inventory levels have shaken market confidence that a deal by the Organization of the Petroleum Exporting Countries (OPEC), Russia and other top producers to cut 1.8 million barrels per day (bpd) from supply will end the two-year glut.
This week, benchmark Brent crude prices slipped below $50 a barrel. Brent has given up all the gains made since the supply cuts were agreed late last year. [O/R]
U.S. inventories are a trusted barometer for the health of global oil markets because of the transparency of the data and their location in the country that consumes around a fifth of the world’s oil.
But U.S. crude inventories have only grown since the supply cuts took effect. The initial spike in oil prices after the deal reinforced already resurgent production from the U.S. shale industry.
The rush back into the fields boosted U.S. shale output to an estimated 5.2 million bpd in May from 4.5 million at the end of 2016. The increase of 700,000 bpd in U.S. supply has replaced much of the output cuts delivered under the OPEC-led agreement.
Offshore production in the Gulf of Mexico has also hit a record, bringing total U.S. output to 9.3 million barrels a day, its highest since August 2015.
That has helped keep U.S. stockpiles full.
“As long as U.S. producers are able to pump oil at a profit then the rebalancing in the U.S. is going to take time,” said Mark Watkins, regional investment manager at U.S. Bank.
“It’s going to be an extended period of time still. I would look to at least the end of the year.”
In addition, producer countries that pumped a lot of their own oil into storage at home have recently been exporting from those tanks to consumer countries such as the United States.
OPEC members typically do not disclose their stock levels. So even though the export of stored oil is part of the effort to draw down global inventories, it also has pushed previously invisible inventories into global storage data.
Those OPEC shipments may now be easing. Thomson Reuters shipping data shows crude exports from the group dropped from March to April by about 50 million barrels to 741.2 million barrels.
U.S. STOCKPILES RISE
U.S. crude inventories hit records earlier this year, and remain up 10 percent since the OPEC-led supply cuts took effect on Jan. 1.
U.S. crude stocks stand at 527.8 million barrels, nearly 30 percent higher than the average of the past five years, according to government data.
Exports from the United States have been steadily rising and have also regularly reached records this year. If markets tighten elsewhere, U.S. exports will increase and this should drain domestic inventories more quickly.
“What you’re going to have to see is global supply across the world drop and U.S. crude ship out before you start to see a meaningful drop in U.S. inventories,” said Watkins.
“And that’s something that’s started a little bit, but it’s pretty marginal.”
Despite the high domestic output, there are some signs that efforts to reduce the global glut may be having an impact in the United States.
A recent four-week run of U.S. inventory draws has been larger than the 2011-2016 average for this time of year, said Credit Suisse in a note on Friday.
More tangible impacts on inventories can be seen elsewhere, some analysts said; inventories simply need more time to return to average levels.
There have been some signs of drawdowns in global inventories, particularly in floating storage, when oil is stored in a tanker anchored offshore. According to Clipperdata this type of storage has been falling near the refining hub of Singapore.
Singapore “acts as such a parking lot for tankers and should we see Singapore floating storage be drawn down materially that would indicate that the market is tightening,” said Matt Smith, director of commodity research at Clipperdata.
Clipperdata estimates that 50 million barrels are floating off Singapore, down sharply from February’s peak of 64 million barrels, which was the highest point in at least a year.
“The lack of visible stock declines ... undermined oil market confidence and dragged markets lower,” said oil consultants PIRA Energy in a note this week.
“Market jitters are unwarranted; oil on the water is declining, OPEC output is declining and stocks are declining. Onshore stock declines are inevitable, but the exact timing is tricky.”
Editing by Simon Webb and David Gregorio
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