OPEC’s agreement to cut oil supplies by more than 1.7 mbpd from the beginning of April has already set oil prices soaring, with hardly a barrel of output having been removed from the market. In the physical market, the Organisation’s objective is to clear the massive overhang of stocks that has kept prices exceptionally low for the past twelve months. The speed at which they succeed in this will depend, first of all, on how quickly crude output is reduced and, secondly, on how quickly these cuts affect the region where the stock surplus lies - i.e. the Atlantic basin.
The outlook is bright for OPEC this time round provided its member states can maintain a reasonable amount of self-discipline over the next six months. Unlike this time last year, Iraqi oil supplies are already at peak levels and lower liftings in March have removed the year-on-year surplus in stocks at sea so that there is no huge volume of oil in transit to boost onshore arrivals during the second quarter.
A 75% overall compliance rate with the agreed output cuts could remove over 100 mn bbls from Atlantic Basin crude oil storage by the fourth quarter, providing a significant boost to prices. Long voyage times from the Gulf will delay the impact of Middle East cuts until late in the second quarter; however, early reductions in oil production by short-haul suppliers in Latin America and Africa could squeeze US supplies just as refinery throughputs start to take off. Moreover, the volume of oil in transit will also decline during the current quarter, depressing an already weak tanker market.