Strong signals that the glut that has plagued the oil market since 2014 is coming to an end is getting evident in Saudi Arabia, a country nearly synonymous with plentiful crude supplies.
In the longest stretch since the Joint Organizations Data Initiative started Saudi supply levels nearly 15 years ago, the kingdom’s oil inventories have declined for six consecutive months despite near record production.
“The drop in Saudi crude stocks signals the rebalancing has started. Crude stocks are coming off in places where either the data is opaque or the market isn’t paying as much attention,” said Amrita Sen, chief oil analyst at consulting firm Energy Aspects Ltd. in London.
The drop in Saudi inventories has gone largely unnoticed with oil traders focusing on supply changes in the U.S. and to a lesser extent in Europe and Japan. Stocks have fallen by 38.6 million barrels as the kingdom provided more crude to the market than it pumped from its oilfields since October, when Saudi supplies reached a record high.
US crude stocks increased by nearly 61 million barrels, over the same period.
“Saudi Arabia cannot continue to draw down stocks forever,” said Olivier Jakob at consulting firm Petromatrix GmbH in Switzerland. He said that in the second half of the year and in 20147, Riyadh “will contribute to the rebalancing” of the oil market with inventories down.
The market is emerging from the global glut opines Saudi Arabia’s new energy minister.
“The worst is clearly behind us. We see a balanced market, we see supply and demand converging. We may have started inventory drawdowns that will continue for the foreseeable future,” Energy Minister Khalid Al-Falih told Bloomberg television when OPEC met in Vienna on June 2.
According to JODI data, noting the lowest level since August 2014, the amount of Saudi crude in domestic and overseas storage facilities stood at 290.9 million barrels at the end of April. Saudi Arabia keeps crude in large storage facilities in Sidi Kerir in Egypt, Okinawa in Japan, and Rotterdam in addition to tanks within the kingdom.
Analysts and traders said that at current trends Saudi crude stocks are set to fall further. According to JODI data, a drop in stocks resulted after roughly 10.5 million barrels a day were supplied to the market in April by the kingdom through a mix of crude exports, domestic refinery consumption and direct burn at power plants. This compared with production of just 10.2 million. With stocks down another 5.6 million barrels the seventh consecutive monthly drop in crude inventories were indicated by the preliminary data for May.
As Saudi Arabia uses significantly more crude between June and September to produce electricity for cooling during the sweltering summer months, the stock draw will deepen further unless the kingdom increases production or reduces exports. The increase in the refining capacity has further added to crude demand within the last year.
“The seasonal increase in crude burn from April and the higher base of refinery runs imply further sharp stock draws or higher production to maintain exports,” said Seth Kleinman, an oil analyst at Citigroup Inc. in London.
Noting the most for the month since at least 2009, the kingdom burned 500,000 barrels a day at its power stations in April. At around double the rate of April, traditionally Saudi crude burn reaches a peak in July to August. Stocks may fall further, depending on whether current export levels and refinery intakes are maintained even if Riyadh raises its oil production this summer to the all-time high of 10.56 million barrels a day set in June 2015.
(Adapted from Bloomberg)