The Fuse

Is OPEC Gaming Exports to Move U.S. Inventories?

by Matt Piotrowski | April 17, 2017

By targeting U.S. refineries through the production cut, OPEC producers have more flexibility in fighting for market share in the growing Asia-Pacific market.

The OPEC cuts may be finally starting to bite. While one week does not a trend make, the recent draw down in U.S. crude inventories is at least partially a result of Saudi Arabia and other OPEC members slashing volumes to American customers as part of their strategy to boost prices. Movements in U.S. oil inventories have an outsized price impact. Since January-February, when barrels that were sold in Q4 reached their destinations, imports from the Kingdom have plummeted by about 462,000 barrels per day (b/d). For the first week of April, the U.S. imported some 883,000 b/d from Saudi Arabia, down by a third from levels seen during the first two months of 2017.

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OPEC’s strategy centers around restricting supply to the Atlantic basin because inventory data in the U.S. is the most timely and visible in the world and it is home to the key NYMEX futures contract. Last week’s crude stock decline coincided with draws in key refined products such as gasoline and diesel, helping support the entire petroleum complex and keeping prices elevated. For the past four weeks, according to preliminary EIA data, the U.S. has taken in about 12 percent less Saudi crude than the same time a year ago. By targeting U.S. refineries through the production cut, OPEC producers have more flexibility in fighting for market share in the growing Asia-Pacific market. For instance, the Saudis, which have throttled back by a total of 600,000 b/d, cut most of its prices to Asian customers for May.

Volumes from other OPEC nations besides Saudi Arabia have also taken a hit as of late. Angola sent just 33,000 b/d to the U.S. at the beginning of April, down by about two-thirds versus January. Iraq, which is reportedly above its production target, has dropped its exports by 13 percent from the first month of 2017. Venezuela’s volumes have been sporadic, but are still lower than last year’s levels.

While a number of critics and oil market analysts argue OPEC is destined to bomb in its market management, we could be seeing the cartel developing an effective new strategy toward the U.S. market, with other victories possible in the near future.

If OPEC nations continue to throttle back as expected, further inventory draws in the U.S. are likely to happen, particularly now that refiners are ramping up for the summer driving season. The EIA, for instance, sees stocks falling by 47 million barrels through the end of the year, a 9 percent drop from current levels. That decline is set to occur even with a sharp jump in U.S. shale production. If the trend holds and the market remains in the $50s or moves into the $60s—the reported target price for the cartel—OPEC will likely consider its production cut, put in motion at the beginning of the year, a success. Of course, a lot may still go wrong from the cartel’s point of view. Shale could rise sharper than expected, demand may underperform, speculators have the potential to liquidate en masse, and its members could produce beyond their production targets. Additionally, based on fluctuations in inventories in past years, it’s important to note that one week’s data needs to be viewed in the larger context. There’s also the issue of Libya and Nigeria, both of which are not restrained by output quotas. It’s unclear if the two war-torn countries will have a free ride after the next meeting in May. Both have seen moderate success lately in increasing volumes—Nigeria’s exports to the U.S. climbed during the latter part of last year and are now up by 30,000 b/d, or 13 percent year-on-year.

While a number of critics and oil market analysts argue OPEC is destined to bomb in its market management, we could be seeing the cartel developing an effective new strategy toward the U.S. market, with other victories possible in the near future.

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