Oil bear must face virtual reality as OPEC says that the global oil glut is “virtually” gone. Now there are reports that the Saudi oil minister Khalid al Falih wants to reduce stockpiles even further. Russian Energy Minister Alexander Novak is on board saying that Russia was committed to a deal on cutting oil supplies until the end of 2018, no matter what. The biggest oil glut of all time that was close to 380 million barrels over the five-year average, has dwindled to a mere 12 million barrels, which is just about 8 hours of daily oil consumption. The glut is virtually gone and while OPEC is happy President Donald Trump is not.
President Donald Trump tweeted ”Looks like OPEC is at it again. With record amounts of oil all over the place, including the fully loaded ships at sea, oil prices are artificially Very High! No good and will not be accepted!” What he will do about it is a different question.
Still, Khalid Al-Falih complains that oil inventories are still above where they were before the downturn, “The inventory drawdown needs to continue” but “we are not decided yet on precisely what is the target.” He says that Saudi Arabia maintains 1.5-2 mil barrel a day of spare capacity, but others must help. “The kingdom cannot take on the burden single-handedly. We expect other countries to work with us to reciprocate the burden that the kingdom maintains on behalf of the industry.”
Yet, it is not just OPEC that has erased the glut. It has really been a demand story that has driven prices, we believe that major reporting agencies have been underestimating demand and demand growth. We believe that global demand is above estimates. Next year that demand growth should continue. We should see a growth of well over 2 million barrels of oil a day, an amount that shale oil producers will be hard pressed to raise production anywhere near those levels. Even then, there could be growing logistical issues and the light quality of the oil will keep us hard-pressed to meet demand.