November 7 2021: Global oil inventories have come down to pre-pandemic levels and may face further tightness as OPEC+ spare capacity nears a critical level by the middle of next year, causing "some people angst," the head of Vitol Asia said Nov. 7.
OPEC+'s gradual approach to output hikes is taking place amid concern about the coalition's spare oil capacity, which is being challenged by production hiccups at some producers, including Angola and Nigeria, security concerns in Libya and sanctions on Iran and Venezuela.
"If there no relaxation of sanctions on Iran, if we continue to see not much coming out of Venezuela and if Libya continues to be troubled, we will very quickly go down to levels [of spare capacity] that cause some people angst," Mike Muller told a Gulf Intelligence webinar. "Right now, we are still talking about a supply cushion of several million barrels per day. Come middle of next year that is a very small level, [and] that is a pinch people are concerned about because they do not see investment going to the US and what little non-OPEC investment has taken place giving us some extra oil from Johann-Sverdrup and some Guyana and places like that is not enough."
The tightness in the oil markets prompted Saudi Aramco to hike its official selling prices for December. Aramco increased all of its December OSPs for Asian, Mediterranean, European and US-bound cargoes Nov. 5 as strengthening demand in Asia during colder months ahead is expected to tighten crude supplies. Aramco's biggest price increases were for light grades into Asia and Europe.
The increase in Aramco's OSPs was "larger than expected," particularly to Asia, Muller said.
"They went further than anybody expected and that was immediately seen as a signal to those who critiqued OPEC+ for not putting enough oil in the market that the Saudis felt they can indeed make higher prices stick," Muller said.
"The market is definitely in a position where inventories are low, there is a perception in the markets that crude supply is tight and the Saudis are pricing their crude accordingly."
The increase in prices comes on the back of two consecutive months of OSP cuts to Asia, when Saudi Aramco slashed prices by $1.40/b-$1.70/b for crude loading in October and November.
Despite the low inventories and US pressure to pump more oil, OPEC+ ministers agreed on Nov. 4 to hike output as planned by 400,000 b/d in December, citing concerns about COVID-19 infections and the demand recovery.
"There was of course an opportunity…that OPEC could possibly take note of the fact that inventories have now depleted to pre-pandemic levels and therefore they have accomplished what they set out to do in many ways," Muller said. "The fact they didn't do so does not come as a surprise to most traders."
OPEC+ stood firm on boosting crude output quotas by the planned increment for December despite prices holding close to three-year highs. The December hike is in line with a July agreement to boost output by 400,000 b/d per month as of August, adding a total of 2 million b/d by the end of the year.
S&P Global Platts assessed Dated Brent at $ $82.75/b on Nov. 5, a retreat from three-year highs of above $85/b in October, but still up 64% year to date.
With oil demand still under pressure from COVID-19 infections in many parts of the world and expected seasonal weakness as the calendar turns to 2022, Saudi energy minister Prince Abdulaziz bin Salman said OPEC+ was "acting in a responsible way" by keeping to plans to increase output only gradually.
Under the OPEC+ deal forged in July, the alliance is relaxing output curbs at a pace too modest for the US, where officials have blamed the group for high gasoline prices. Key customers India and Japan also lodged complaints, saying an overheated market could derail their economic recovery from the pandemic.