FreightWaves Oil Report: OPEC Cuts Are Getting Near The Target

A weekly look at what occurred in the oil markets of the U.S. and the world this past week.

OPEC's work is over. Or is it?

There were reports this past week that the cuts in OPEC production that began in earnest in December (the same month as the group's meeting where it vowed to cut output), had completed its task – it was at a level that should balance the market.

For example, in its monthly report, OPEC itself saw the group's production had fallen to the level it also estimated the group needed to produce this year to balance supply. Its estimate of the demand for OPEC crude this year, on average, is 30.5 million barrels per day (b/d). It also said that based on secondary sources that estimate OPEC output, OPEC nations produced 30.55 million b/d in February. With that minor difference, it is entirely possible OPEC can claim victory.

It's not quite the victory lap in regard to the International Energy Agency (IEA) numbers that came out a day after the OPEC numbers. The IEA estimated that OPEC output was 30.68 million b/d in February. What the IEA refers to it as the "call" on OPEC crude, similar to the demand figure posted by OPEC, was 30.6 million b/d for the remainder of the year. So in both the OPEC and IEA reports, their estimates of February production were only slightly more than what OPEC believes it needs to produce, on average, to keep the market in balance the remainder of the year.

But the group may not be done.

A story published by Bloomberg late in the week said Saudi Arabia is going to supply its clients with "significantly less oil than they requested in April." The story also said the nation's supplies have been cut by 500,000 b/d this month. According to S&P Global Platts, Saudi production in February was 10.15 million b/d. The March and April cuts would be applied against that. Whatever the kingdom is producing at the end of April should be compared not only against the February figure but against its promise back in December to cap production at 10.31 million b/d. It met that promise...and then some.

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The numbers of additional OPEC cuts were just one piece of bullish news during a week that saw prices rise to their highest level since November. But there's an asterisk there – not all prices reached a four-month high-water mark. RBOB gasoline, for example, reached a five-month high.

But ultra-low sulfur diesel barely budged while WTI crude and RBOB gasoline were climbing. The numbers coming out of the Energy Information Administration can be seen as somewhat bearish. U.S. distillate inventories reported this past week were slightly more than the five-year average but not by a large amount. The category of "product supplied," which essentially is demand, is less than the five-year average for the second week of March. The end result has been remarkable stability for truck drivers buying diesel and a stable market where fuel surcharges barely budge and provide few opportunities to either hurt or help shippers and carriers. Since the start of the year – the second week of January, actually – the weekly U.S. Department of Energy diesel price had a five-week run at around $2.97/gallon, jumped about 10 cents per gallon over a period of three weeks and this past week held essentially flat for a week. There are no signals from the diesel market to indicate it will go up or down by much when it's released Monday.

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Iran has been able to continue producing and selling oil into the market despite U.S. sanctions against it. The reason? Waivers granted by the U.S. government to several countries to allow them to continue buying Iranian crude. But those waivers are coming to an end in the coming months and there were conflicting reports this week about what Washington will do after that. Interviewed at the CERAWeek industry meeting in Houston, Brian Hook, the special representative for Iran at the U.S. State Department, said if the turmoil in Venezuela were to continue – highly likely – additional waivers could be granted to allow additional Iranian exports despite the waivers, according to a story published by S&P Global Platts. But soon after Hook made those comments, Reuters published an article quoting two sources as saying the U.S. will seek to tighten the screws on Iran through the sanctions and cut its oil exports to less than 1 million b/d. According to the latest Platts monthly report, Iranian production is 2.72 million b/d – which has been constrained by sanctions, with Reuters estimating its exports to be about 1.25 million b/d. The Reuters article said it did expect waiver renewals for China and India would be granted but that might be the extent of the dispensation.

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