OPEC Cuts are Starting to Reduce the Oil Overhang....

As Brent crude futures look to break above $55 a barrel this week, it appears that OPEC's production cuts are slowly chipping away at the global crude oil overhang. In Q1/17, data suggests that global crude stocks built by much less than they did in the first quarter of last year even though refinery maintenance globally was much heavier. Notably, Iran has sold all of the oil it had stored for years at sea and Tehran is now struggling to keep exports growing as it grapples with production constraints. Further, trading giant Vitol recently sold millions of barrels of Nigerian crude oil from storage in South Africa's Saldanha Bay with cargoes sailing for Taiwan, India, the US and Europe. Interestingly, Nigeria's new loading programs are now finding buyers at a reasonable rate – in stark contrast to the past two years, when any sales from storage put immense downward pressure on prices for newly loaded cargoes. Finally, Nordic bank SEB recently noted that global oil inventories in weekly data have dropped by 42 million barrels in the last four weeks.

Contrasting this data has been stubbornly high US crude oil inventories, which has created some confusion in the oil markets. It is important to note that rising US crude inventories are mainly a function of reduced U.S. refining activity on the one hand and U.S. crude oil imports on the other. Overall, it is going to take some time for all of the pieces of the global oil inventory picture to become clearer. That said, should OPEC decide to extend its production cuts in May, US oil inventories will likely start to draw down, as has been the case in other global oil markets including Iran and Nigeria.