High U.S. oil stockpiles have undermined OPEC’s output cut deal


The energy industry scrutinizes U.S. oil stockpile data every week for evidence that OPEC supply cuts are ending a global crude glut, but growing domestic output means the world’s largest oil consumer may be the last place to feel the cuts.

Stubbornly high U.S. inventory levels have shaken market confidence that a deal by the Organization of the Petroleum Exporting Countries (OPEC), Russia and other top producers to cut 1.8 million barrels per day (bpd) from supply will end the two-year glut.

This week, benchmark Brent crude prices slipped below $50 a barrel. Brent has given up all the gains made since the supply cuts were agreed late last year. [O/R]

U.S. inventories are a trusted barometer for the health of global oil markets because of the transparency of the data and their location in the country that consumes around a fifth of the world’s oil.

But U.S. crude inventories have only grown since the supply cuts took effect. The initial spike in oil prices after the deal reinforced already resurgent production from the U.S. shale industry.

The rush back into the fields boosted U.S. shale output to an estimated 5.2 million bpd in May from 4.5 million at the end of 2016. The increase of 700,000 bpd in U.S. supply has replaced much of the output cuts delivered under the OPEC-led agreement.

Offshore production in the Gulf of Mexico has also hit a record, bringing total U.S. output to 9.3 million barrels a day, its highest since August 2015.

That has helped keep U.S. stockpiles full.

“As long as U.S. producers are able to pump oil at a profit then the rebalancing in the U.S. is going to take time,” said Mark Watkins, regional investment manager at U.S. Bank.

“It’s going to be an extended period of time still. I would look to at least the end of the year.”

In addition, producer countries that pumped a lot of their own oil into storage at home have recently been exporting from those tanks to consumer countries such as the United States.

OPEC members typically do not disclose their stock levels. So even though the export of stored oil is part of the effort to draw down global inventories, it also has pushed previously invisible inventories into global storage data.

Those OPEC shipments may now be easing. Thomson Reuters shipping data shows crude exports from the group dropped from March to April by about 50 million barrels to 741.2 million barrels.

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