Discussing Global Oil Inventories on Bloomberg's Commodities Edge

Heading into 2019 and OPEC's meeting in Vienna on December 7th, we've observed a few interesting developments in oil inventories. Not only have we seen global inventories building in Q4, when we normally expect a draw, but we've also observed builds in non-OECD countries. Check out some of our findings on Bloomberg's Commodities Edge with Alix Steel. (Video above and transcript below.)

Video Transcript

Alix Steel: I'm Alix Steel, and welcome to Bloomberg Commodities Edge. It's 30 minutes focused on the companies, physical assets, and the trading behind the hottest commodities with the smartest voices in the business. First, let's kick it off with Spot On. It's our take on the big story. Joining me now is Regina Mayor, Global Sector Head and U.S. National Sector Leader of Energy and Natural Resources at KPMG, and Kevin O'Brien, Chief Business Officer at Orbital Insight, an analytics company whose data is used by big oil traders like Andy Hall.

Our spotlight, oil. Take a look at WTI breaking below $50 a barrel this week as three world leaders will decide its fate. The world leaders say different things. If you take a look at what Saudis have said versus President Trump versus Vladimir Putin, they're all on different pages. Regina, what happens at the G20?

Regina Mayor: Well, I do believe that at the G20 we are going to get a deal on cutting production, and it really is most critically important to Russia and the Saudis. Now, the U.S. administration has a different point of view, but frankly, I don't know that we have a big voice in that conversation because we have such a deregulated market and shale producers will do what shale producers will do. OPEC has the ability to cut production and drive prices back up, and if you look, both the U.S., Saudi Arabia, and Russia have exceeded 11 million barrels per day in production just in the last month alone. So, everyone has the pedal to the metal, and OPEC's really the only one that can help decelerate.

Alix Steel: So the question then becomes, Kevin, how much? So how much do they have to cut? And you're looking at storage levels all over the world in different areas. How much needs to be cut?

Kevin O'Brien: Well, we've seen some really interesting trends. We think the market missed actually in Q2 going into Q3, especially non-OECD countries, that when they were expecting to see draws, we actually saw slow incremental builds, and the market didn't catch up to that till about two months later, which we're currently up to now, so the global number that we have at Orbital is about 40 million barrels year on year increase, and so you have to look at some type of production cut off of that number. The Saudis have said a million might work, but if you also take into account that production's coming out of the Permian Basin, for example, you've got an offset factor there, so you've got to really keep an eye on that in going into Q4 because normally you're expecting draws in Q4 and we're seeing continued builds, and that's something the market's still reacting on.

Alix Steel: And you take a look at, say, where the builds have been and where the production has been since June, for example, too, that also creates some questions, so we have a chart that shows yes, it was the U.S., yes, it was Russia, but it was also other OPEC countries, right? The quality matters. If you cut light, sweet, okay, that's going to provide the floor for Brent and WTI. If you cut heavy oil, that's still going to cause a problem in the market because we need it. We don't have enough of it.

Regina Mayor: Right.

Alix Steel: What do you see?

Regina Mayor: No, I think you're absolutely spot on. What we see is there's still significant demand for hydrocarbons, and yes, there are differentials, and we still like the WTI Brent differential. It helps us out in the U.S. quite a bit. And I don't think people really understand the different grades. We even had the administration making some comments about it that were comparing Brent and WTI in an inappropriate way, and I think the market is still really quite confused by all those signals.

Alix Steel: And, Kevin, then based on that, when you take a look at the tank tops, what do you see if you take look at global tanks, for example?

Kevin O'Brien: What we do is look at the globals. We track about 25,000 tanks globally, so we're looking at OECD, non-OECD, you're looking at EIA, IEA type of markets, but what we've seen is, you've seen growth in China, which is a little bit unusual. You're seeing growth in these non-OECD markets, and when you split apart OPEC, I've seen natural increases with Iran, just given the change of the policy right there. Iraq is pumping a lot up into Turkey as well, where you do see some pullback now with the Saudis, but you still have that discrepancy of those continued builds, where the market's expecting to have some drawback. And it's really when you think about going into Q1, that's kind of the inflection point that you're looking at here, where you're expecting those drawdowns to come and they're not, so you could have a major supply issue going into Q1.

Alix Steel: So, major supply issue, so that's the reality versus market perception-

Kevin O'Brien: Correct.

Alix Steel: ... so where is that dislocation?

Kevin O'Brien: Well, I think the big problem right now is there's a latency factor. So, if you think about, you're trading the world's largest commodity and you can have a $7 swing in an hour, but you can have a seven-day lag even with the best data coming out of EIA. If you look at OECD markets, you could have a 30-day lag. If you look at non-OECD markets, you could have up to two months. So that, I think, is one of the big issues is how is the market reacting to these actual inventory levels of these different methodologies that are used by different governments and different organizations, and I think that's something I think the market's got to come to grips with.

Alix Steel: Right, and they'd come to grips really fast, which means more volatility, and it means also contango. If you take a look at December 2018, 2019 spread, that flipped into contango. So, when you look at that, Regina, if you're an oil producer, what do you tell them? When the market's moving so fast on data that might not be realistic at that moment-

Regina Mayor: Exactly.

Alix Steel: ... and then you have something like contango which then no one's going to want to be selling oil at this point.

Regina Mayor: Exactly. Well, that's where, I think, you have to separate what the market and the traders are doing versus what the producers are doing. They are focused on the long-term, the long haul. I really don't necessarily understand the fundamentals of what's driving some of these short-term behaviors, because we still see production shortfalls within the next 18 to 24 months. When you look at what the FIDs that were taken on the major projects that really are required to fill the gaps in demand in the longer term forecast, only three to four of those were taken during a downturn, and even recently, some of the recent FIDs, they're smaller projects.

I know you're going to talk some about that in your show later today, but we need a higher level price, in the 50s at least, to go after those developments in deeper water, riskier plays, other parts of the world. We still anticipate that peak demand will be 110 million barrels per day by 2035. We're only at 101 million barrels per day. Where is that extra production going to come from, and frankly, it really can't come from the Permian?

Kevin O'Brien: True.

Alix Steel: Fair point. Guys, thanks so much. Really great to see you, with thanks to Regina Mayor of KPMG, and to Kevin O'Brien of Orbital Insight.