World oil inventories on a correction course, says Minister of Energy

'We are now testing the market for the price and we have seen some of the investments come back,' the UAE energy minister said.

The UAE’s energy minister, Suhail Al Mazrouei, said on Wednesday that the world oil market was showing consistent signs of correcting its enormous supply glut. Ravindranath K / The National

The UAE’s energy minister Suhail Al Mazrouei said on Wednesday that the world oil market was showing consistent signs of correcting its enormous supply glut.

But both he and the secretary general of Opec, Mohammed Barkindo, remained non-committal about whether the supply restraint deal reached by Opec members and 11 other major oil exporters, which has been in effect since January, will need to be renewed for an another six-month term when it expires in June.

“I think the market is correcting itself,” said Mr Al Mazrouei, speaking on the sidelines of the GCC Petroleum Media Forum in Abu Dhabi, and pointing to the fact that benchmark oil prices have been relatively stable at higher levels since the output deal was struck back in December.

World benchmark North Sea Brent crude has averaged around US$55 per barrel so far this year, up from about $45 per barrel for the whole of last year, although there was a 10 per cent dip last month followed by a recovery when it became clear inventory levels were starting to decline.

Mr Barkindo said that world inventories were the “key variable” that the 24-country “Opec and friends” group had agreed on, and its progress in bringing those down from historically high levels that would be a main determinant of future action.

While oil inventories in the United States have remained stubbornly high, fed by a resurgence in domestic shale oil production, more recently data is showing that stocks in places such as offshore storage in the Caribbean and in tankers off the shore of Iran have been declining.

“We need to look at both the [oil] products and the crude and we need to look not only in the United States but we need to look internationally, and I think there is the trend where there is a reduction,” said Mr Al Mazrouei.

The comments echo those of some influential analysts, such as investment bank Goldman Sachs, whose commodities markets analysts earlier this week said investors should show patience this year so that the producer cuts can work through the system and bring the market back into deficit.

Citibank also said it expects an improving market this year and forecast oil prices would be back up to $60 per barrel by year-end, although its analysts said that would only be the case if the Opec/non-Opec deal was extended in June.

While some of the countries involved in the deal have supported an extension, including Kuwait, whose minister, Essam Al Marzouk, was chief architect of last year’s deal, the key decision-makers, Saudi Arabia and Russia, have been wary of making a firm commitment.

Indeed, the Saudi energy minister, Khalid Al Falih, has expressed misgivings about carrying the main burden of the cuts while others get a free ride from the ensuing oil price rise. This referred both to those in the non-Opec group – particularly Russia – who have been slow to make their pledged cuts, as well as to the US shale oil producers who are outside of the deal and have seen their production rise from a trough of 8.6 million barrels per day in September to above 9m bpd.

Mr Barkindo counselled patience on compliance with the oil deal.

“In Opec we have a history of managing supplies, a history of compliance mechanisms, but for our friends from the non-Opec group it is the first time they are subjecting themselves to such mechanisms,” the Opec secretary general said. “These are sovereign decisions so people should not take [the cuts] for granted, but the fact they joined us in December is a huge success, and that they’re gradually moving toward compliance also is a great success.”

The Opec members have also been wary of saying if they have a target price for oil because they have to tread a fine line between getting prices high enough to ease pressures on their government coffers, but not so high that it encourages marginal oil production to come flooding back to the market.

Mr Al Mazrouei said that he thought prices would need to rise further to attract back to market the investment needed to ensure steady supplies in the medium to long term. “We are now testing the market for the price and we have seen some of the investments come back,” the UAE minister said, adding that “it’s not up to the level we’d like to see because we need to invest to replace the natural decline.”

The US shale production that has surged back is technically the type of oil reserves that run down quickly in individual fields, whereas much of the estimated $300 billion to $400bn investment that was cancelled during the oil price slump of the past few years was in discovery and development of bigger reservoirs, such as offshore deepwater provinces, which underpin much of world oil supply.

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