I feel like we are very close...if not seen at open today.

Production cuts lag 4-6 weeks to impact physicals supply demand and inventories.

The recent worry was due to classical misunderstanding between demand and consumption.

 

Even a pro HFIR has asked yesterday "For oil bulls, the biggest ? is why is China's onshore crude storage surging when "apparent" oil demand is so high."

 

The answer is simple - demand doesn't equal consumption. China is the best in understanding oil market pricing mechanisms and uses their power for their advantage.

China simply were importing significantly more oil than they were processing and consuming (even adding product exports) in Q1 to help building their inventories of cheap crude. They will reduce purchases later when prices rise.

China uses such practices every year. 2020 was a culmination.

 

Supply-Demand. The gigantic question traders ask - should OPEC+ cut more in a few days, if yes by how much, or not ?

 

Lets analyze.

 

After a monster cut in 2020 OPEC+ has started raising production (quotas) 400K bpd monthly in 2021.

While correct the raising production is not just turning valves for most countries, it requires adding capex many couldn't afford.

 

As a result there were production leaders who complied and laggards who under-complied. So in reality raising was about 280K bpd monthly vs. 400K pbd quotas.

 

By November-December 2021 supply-demand by using quotas has stabilized while inventories have declined materially, but not sufficiently yet as SPR was used.

However several underperformers were well behind.

As a result leaders have decided to take market share, and OPEC+ has continued raising quotas 400K bpd (280K bpd actual) monthly in 2022.

 

US and IEA have pushed them to continue to create an imbalance for lowering prices.

The high demand summer season was masking overproduction.

 

But by September 2022 SA with their alliance have discovered material overproduction and have cut 2 mm bpd (quotas) since October 2022, about 1.2 mm bpd actual production.

But OPEC cut was proved quickly.

 

In short 3 months by New Year 2022-23 it was apparent that more cuts are needed for balancing the market. But political conditions were heavy as EU started embargo of Russian crude since December following products since February 5.

And crude price cap in addition.

IEA was fueling the false narrative of coming plunging Russian production that never happened.

 

So OPEC+ didn't cut waiting for several months.

Russia was even raising a little as sanctions, embargos and price caps didn't allow them to function wisely. They just fulfilled all orders they could find.

 

Russia was the 1st who discovered overproduction and has pledged to cut 500K bpd....but everyone who was watching previous cuts since 2015 should notice that Russia never turned spigots, but rather allowed its production to naturally decline.

This time was not different. Russian production has declined 500K bpd by May.

 

6 other leaders of OPEC+ has decided to cut 1.15mm bpd (from quotas, not m/m) since May until the YE.

 

 

 

Also US production was raised by ~ 1mm bpd since the Nov-Dec 2021 as today's EIA-914 monthly report showed 12.7 mm bpd in March-23 vs. 12.2-12.3 mm bpd in weeklies explaining 400K-500K bpd in higher adjustments (but without inventory numbers change)

Other countries were boosting supply slightly...

 

Demand (consumption) has risen...but likely not as high as false IEA narrative predicted. Air travel was rising, but gasoline demand - just barely mostly in Asia as US/EU still allow working from home that reduces commute.

 

1. Should OPEC+ cut more or not? 

2. Will they?

 

The market is finally balanced in early basis IMHO as OPEC+ quotas were brought to November-December 2021 levels.

The OPEC+ leaders will likely comply with quotas, but laggards have some room to raise more according to quotas. And they will.

 

US production hasn't peaked yet despite falling rig counts. Permian rigs (the only rigs that matter) are leveling off and are very close to high.

But total smaller rig count will result in materially lower pace of production rise rise....perhaps 200K bpd in H2 sequentially....like it or not.

 

Demand is rising and air traffic should rise more, but far less than 2.2 mm bpd IEA predicted. But we should achieve at least 1 mm bpd.

Air traffic is on the path of reaching 10% growth.

At 100mm bpd total demand and 60%/30%/10%  gas/dist/jet ratio jet fuel demand should rise by 1 mm bpd this year (not sequentially).

 

Market sentiment has switched from  LT and even mid term to a very short term supply/demand. I mean demand (not consumption) really. Probably due to recession worries. Bids have disappeared. Nobody wants buying oil...except end users (refiners).

 

And here's trick. While US refineries are coming back from maintenance...along with Russian refineries - Chinese refineries are on the verge of maintenance.

In addition Japanese refineries have cut 1 mm bpd processing in May - due to maintenance and repairs.

 

https://www.argusmedia.com/en//news/2454611-japan-temporarily-shuts-1mn-bd-refining-capacity?backToResults=true

 

This is material....unusual...but the size will hugely impact product supply.

1 mm bpd refinery shut doesn't mean 1 mm bpd process loss as refiners rarely operate at 100%...850K bpd loss is liklely

Japan will have to buy products from somewhere...perhaps Russia and middle East. 

Such reduced demand was likely cause of SA and OPEC+ to cut production since May. They see demand in real time. 

 

Is the Japan temporary demand cut factored in the OPEC+ production? Likely Yes IMHO....but again the market is trading on physical crude supply/demand.

 

At such conditions and no-bids market OPEC+ may need to cut 1 mm bpd more to offset Javanese refineries demand loss ...and some potential Chinese sequential loss.

That would also preserve OPEC+ credibility after recent ABS "watch out"

 

The other method would be reducing exports by the same amount while keeping quotas and production with no change. This is the more likely scenario as it wouldn't force OPEC+ to raise back 2 months later.

The problem with this - SA is the only country who can do it by simply using more oil for internal  A/C usage.. I doubt anybody else will do it. 

 

I still think the 1st option is better as it'd have combined all or most OPEC+ members, but the 2nd option is more likely.

 

But overall the market has discounted all or almost all negatives...although the last 1-5%  is most pailful

 

Best of luck,

romm