From Platts' The Barrel blog, April 19, 19:32 UTC:
This is the first part of a three-part series on headwinds facing the crude market.
These have been interesting times in the crude market. Prices had been trading comfortably above $50/b since late March, with bulls re-trenching on the idea that Saudi-led OPEC supply cut will soon tighten balances.
And while today’s price declines could prove temporary, a measure of caution is advised to all bulls, for two key reasons — reasons that we’ve been watching closely since November.
First, the expectation that the OPEC supply cuts will tighten global crude supply is overdone. While there is likely a limit to how many OPEC barrels US shale can replace, anyone who thinks the godfathers of the shale revolution are going to sit idly by as prices soar probably wrote a book on peak oil.
Second, global refined product stocks are ample and will have to clear — with a noticeable increase in crack spread and differentials — before forecast demand growth can meet expectations.
The bulls say given enough time, OPEC-led supply cuts will drive prices higher. A recent S&P Global Platts survey pegged OPEC compliance on stated cuts at around 115% over January to March. That is truly incredible, and clearly part of any bull’s fundamental calculus.
But if cuts are actually taking place, what effect are they actually having?
The market’s ability to flood Asia and Europe with crude has become entirely unshackled. How long will it be before cut OPEC and Russia volumes are replaced by barrels out of Latin America, the US, Canada, North Sea and West Africa? And isn’t that already happening? Is this not the new normal?
US exports — and barrels from the North Sea and elsewhere — are indeed displacing the efficacy of the OPEC cuts. And the degree to which this is sustainable is key to determining when the market will balance.
For example, when a North Sea Forties cargo gets booked on a VLCC to South Korea or China, it is true that refiner demand in that Asian market is likely stronger than demand in Northwest Europe. But this ignores a key aspect: The relative weakness of the Forties barrel versus the relative strength of a Saudi, UAE or Russian barrel is what makes the arbitrage workable....MUCH MORE