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Is the OPEC era over? (part 2)

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Inventory analysis

We have seen crude oil inventories build worldwide, but nowhere is the transparency of those builds more clearly measured than North America. Just looking at the stocks of crude oil reported by the EIA we have seen inventories grow by more than 100 million bbls in the US alone during the past six months. PADDs 2, 3 and 4 are at all-time storage highs. But the current crude stocks do not tell the whole story. The capacity to store crude has significantly increased over the past five years.

Cushing, Oklahoma, the single most important group of storage terminals in the US, is monitored twice weekly by Genscape. Inventories have surpassed 60 million bbls for the first time in history. However, the storage capacity at Cushing has been expanded by more than 30 million bbls since 2009 and now exceeds 85 million bbls.

The same story of record stocks and significant capacity growth is true for most locations. Storage at Hardisty, Alberta, has seen capacity grow by 25%, since Genscape started tracking inventory levels in Canada in mid 2010, and stocks in Edmonton are the highest they have been since that time. Several new terminals were built along the US Gulf Coast, and Genscape is currently monitoring the construction and development of 40 million bbls of new crude storage capacity in PADD 3. That is in addition to the 60 million bbls of capacity that is currently empty along the Texas Gulf Coast between Corpus Christi and Beaumont.

If crude production continues to outpace demand at its current pace, there is still ample storage space available to accommodate additional stock builds for at least another year. Once stocks at Cushing have reached operational maximums, the production that has been going into storage there, about 2.2 million bbls per week since November 2014, will work its way back into the US Gulf Coast and East Coast markets. In addition to putting downward pressure on WTI, especially the front of the price curve, it will also put pressure on the differential for other grades of crude.

The deferred production of wells discussed above is effectively storage beyond that monitored by Genscape and reported to the EIA. The impact of so much crude going into storage will be to keep prices lower for a longer period of time since the storage will have to be run off before any production shortfall will significantly affect the market. The more stocks build, the longer the storage hangover will last and the more difficult it will be for marginal producers to ride out the downturn. Given current storage and production, this could be a long and deep market cycle that will favour the most efficient producers.

Conclusion: will OPEC prevail?

As much as the US producing sector has taken an economic hit from the collapse in prices, so have OPEC countries, many of which have been continuously lowering their budgets and cutting social programmes to keep their heads above water. Although Saudi Arabia, the orchestrator of the OPEC market share war, continues to reaffirm that it has no intention of cutting production anytime soon, the situation on the OPEC front could change.

First, the OPEC countries that are experiencing financial difficulties are becoming more and more uneasy with the current strategy. The upcoming June OPEC meeting will be interesting, as the OPEC ‘have nots’ battle the OPEC ‘haves’ on the strategy.

However, the growing unrest in OPEC countries in the Middle East and Africa could ramp prices back up, resolving the organisation’s internal conflict while undermining the Saudi-led push for market share. In spite of the growing global surplus of crude oil, the market was reminded at the end of March that the surplus is fragile and could be short-lived if those geopolitical issues continue to grow.

Yemen produces only about 100 000 bpd of oil – a drop in the bucket in a world currently afloat in oil. The other risk is shipping around the Gulf of Aden or through the Bab el Mandeb waterway, although it does not appear that the Houthis have the capability to interrupt shipping. In addition, the Bab el Mandeb is well patrolled by international vessels.

Certainly, there is always the concern of this type of a conflict spreading to other areas of the region. So, it is far from certain how the final chapter in OPEC’s market-share battle will play out, depending as much on geopolitical conflict as on whether US producers cut production and global demand picks up.

Written by Jodi Quinnell, Brian Busch, Dominick Chirichella and Robert L. Barton, and edited from published article by Stephanie Roker

To read the full version of this article, please download a copy of the Extreme 2015 issue of World Pipelines.

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