A handy measure in the oil analysts toolbox is what’s known as the ” call on OPEC crude”, which is basically what remains for OPEC crude production after world demand is subtracted from non-OPEC liquids supply and OPEC NGLS. In one number, a market follower can get a sense for what OPEC needs to produce to balance the market,draw stocks or in recent quarters when comparing actual OPEC crude production to its call- add inventory. Both the IEA and OPEC publish quarterly calls on OPEC crude in their monthly reports; one can derive the call on OPEC crude from the EIA’s Short -Term Energy Outlook. We like to average the three reports “calls” . Taking the published reports for February the average Q1 call on OPEC crude is 30.5 mbd,Q2 is 31.0,Q3 is 32.4,and Q4 is 32.3. OPEC production in January according to OPECs Monthly Oil Report secondary sources was 32.3 mbd . Should OPEC simply freeze output for the balance of the quarter (unlikely as Iran output will continue to rise from the 2.93 mbd reported for January) and lets say freeze output for the balance of the year at 32.3 mbd,inventories will grow by 1.8 mbd in Q1 ,1.3 mbd in Q2 and will cease to grow in Q3 and Q4. Significantly stocks won’t draw in 2H but at least they may not increase at a 32.3 OPEC output. While that should be somewhat bullish on the face of it, the problem of course is the absolute enormity of the surplus to say nothing of OPECs actual ability to produce at 32.3 mbd.
So how big is the surplus really? The IEA reports that OECD stocks at the end of December 2015 were 3,012 million barrels an increase of 274 million barrels from December of 2014 and an incredible 359 million barrels above the four year average. Or put another way, OECD stocks would have to DRAW by almost exactly 1.0 mbd for the rest of this year just to bring inventories to average levels. Nominally stocks, according to the OPEC calls, will INCREASE by 1.55 mbd in 1H 2016 further complicating any OECD inventory normalization. Furthermore we have not accounted for the much more opaque non-OECD stock levels. Undoubtedly non-OECD inventory is in surplus, but owing to the non-OECD ever-changing demand characteristics and the unreliability of the data its difficult to estimate by how much. What continues to be clear, however, is that the mountain of inventory that the market has to climb has not peaked. Conquering this mountain is going to be a long slog up an uncertain trail.
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