Energy Stat of the Week by J. Marshall Adkins

Energy Stat: Oil Model More Bullish Despite Recent OPEC Announcement

June 25, 2018

It has been 18 months since the OPEC+Russia production curtailments originally took effect in January 2017. During most of 2017,there was a total disconnect between bullish declining global petroleum inventories and bearish oil price action (languishing around$50/Bbl for the first three quarters of 2017). Since late 2017, however, the oil markets have finally begun to “get it”, and oil priceshave started to reflect the consequences of the undersupplied oil market that has existed since the OPEC+Russia curtailments hadbeen initiated. At this point, it should be readily apparent that OPEC’s job is largely done. As shown in the graphs below, globalinventories have retreated from record highs to below the midpoint of the five-year average. This past weekend, the groupconfirmed the rebalancing as the OPEC+Russia “cuts coalition” announced that it is proceeding with a gradual unwinding of the cuts.While the oil market has taken a rather mixed interpretation of these OPEC+ actions, we view them (and the overall state of the oilmarket) as decidedly BULLISH for future oil prices. In today’s Stat, we will explain why 1) the increase in OPEC+ supply merelyaccelerates by about 4-5 months the supply uplift that we had already modeled; 2) the increase in OPEC+ supply will not even offsetrecent supply declines from Venezuela and Iran; 3) the amount of excess capacity (or supply shock buffer) in the global oil systemwill now approach zero in the next six months; and 4) despite the “normalization” in the absolute oil inventories shown below, webelieve the more important metric – inventories on a days of consumption basis – shows that U.S. and global oil inventories willlikely be dangerously low by the end of 2018. Simply put, the increase in OPEC plus supply is like putting a Band-Aid on a bloodgushing wound that needs stitches.