Rising Inventories Factor in OPEC+ Cut Extension

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The recent decision by OPEC+ members to extend production cuts underscores their concern over the strength of market fundamentals, evidenced by the increase in global crude oil inventories.

At the June 2 meeting, OPEC+ was widely expected to maintain its policy of reducing supply to support oil prices. 

The oil producer group extended output cuts, due to expire at the end of June, until the end of next year, but opted to extend a smaller portion of voluntary cuts until the end of September. 

The coordinated efforts, in place since late 2022, have been credited with stabilizing oil prices against a backdrop of sluggish demand, owing to higher interest rates.

Initially, the results were promising. After a net build in 2022, global crude oil inventories ended 2023 lower than they began the year, according to Ursa Space data, indicating the cuts were effective. 

However, inventories have increased this year, suggesting supply still exceeds demand and justifying continued production cuts.

Compared with 2022, global inventories fell into a deficit last year that grew in size the last six months. In 2024, inventories remain below 2022, but the deficit has decreased. 

A closer look shows this year’s builds have not been concentrated in either developing or advanced economies. 

The 2024 year-to-date builds are split almost evenly between OECD members and non-OECD countries, with OECD builds being larger on a percentage basis.

Major forecasters have flagged OECD economies as a potential drag on global demand. OPEC and the US Energy Information Administration project modest OECD demand growth, while the International Energy Agency forecasts a potential contraction.

Outside the OECD, the outlook is uncertain, especially in China. The IMF has upgraded its growth forecast for China in 2024, but the ongoing property crisis poses significant risks.

Notably, China’s crude inventories have increased due to slower refinery processing, staying above 2022 levels for most of 2023 and into this year. 

Are there other actions OPEC+ can take to deplete inventories? For starters, compliance with output targets can be improved. Some countries have reportedly been exceeding their quotas. 

An April survey by S&P Global Platts found OPEC+ countries produced 249,000 b/d above quota, achieving a compliance rate of 96.97%. Similar compliance rates were calculated in January, February and March of this year.

Achieving better compliance rates is one area within the group’s control, unlike the various external factors affecting supply and demand, which collectively determine whether inventories rise or fall and, ultimately, impact oil prices.

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