OIL RESERVES CHALLENGING OPEC POWER

The Organization of the Petroleum Exporting Countries (OPEC) ‘plan to raise oil prices with output cuts is facing its first big challenge. Traders are starting to unleash the vast global reserves of crude floating off Singapore that threaten OPEC’ power over markets.

Oil prices rose about 20% since OPEC decided to cut production in late November. The price nicely settled above $50 and some, including us were expecting to see a new floor above $55. However, it was without unveiling the power of the large trading houses that for over 2 years now have piled up huge quantity of oil in reserves across the globe.

First, we heard that all oil storages were filled up and we know that to get a legitimate storage in Rotterdam waiting period is close to six months. Across the world, it is the same story: no space in tank farms.

Then we heard about the “floating inventory”. Traders started to pile up hundreds of oil tankers floating around the world or anchored off large ports such as Singapore and along the Malaysian coast.

OPEC is scrambling to find ways to force stored-oil volumes down to more manageable levels. But price recovery called on U.S. producers to start to crank up the output. The war between OPEC and Texas started to rage and price leveled off between $52 and $55.

Now are traders starting to unleash a tiny fraction of their reserve or is it a slowing down of the Chinese demand?

A projection of China’s crude oil demand for this year was actually one of the two drivers behind the latest jump in oil prices, which saw Brent crude pass the US$55-a-barrel mark to reach US$56.05 in European trading earlier this month. Projection came from CNPC, who said that 2017 will see “Chinese oil demand hit a record 12 million barrels daily” said the state-owned energy giant, net imports would rise by 5.3 percent to 396 million tons in 2017. But are this true data? One can wonder when oil tankers are piling up off Singapore, the oil gate to Asia.

What will be the answer from OPEC now? Is $48 enough to satisfy the members or do they need a higher threshold? There is a race and a delicate balance between OPEC production cuts and how the other producers will react, the non-OPEC countries starting with Russia and the U.S. shale producers.

Saudi Arabia, clearly needs a higher price as ARAMCO is finalizing its 2018 IPO and a good balance sheet is important-nothing better than higher price- The Saudis announced that they were cutting more than it had promised under the OPEC agreement. “Our objective is to set the market on an accelerated re-balancing course,” said the Saudi Minister of Energy at a conference in Abu Dhabi.

The amount in storage remains a hangover from two years of low crude prices that made it potentially profitable for traders to buy Oil, store it in tanks, ships and even trains and sell it later when prices rose and here we are…..

Traders are now in charge, they control the market. OPEC nor US producers can affect the price except if OPEC would impose more drastic cuts.

Reserves are great for geopolitics and security reasons but if they are controlled by speculative forces we could see havoc on the market as finance and greed are in control not supply and demand.

We may remember OPEC Secretary-General Mohammad Barkindo words when he said earlier “inventories are the primary target, not U.S. shale producers, which are often described as the group’s chief adversary”.

Where is, the price going? This is a big uncertainty now and there is plethora of factors affecting the rules of the market starting with the expected interest rate hike in the US that will create more strength in the US dollars the currency used to purchase Oil…..