By Benoit Faucon, Sarah McFarlane and Ahmed Al Omran
A big obstacle is emerging for the Organization of the Petroleum Exporting Countries' plan to raise oil prices with output cuts: vast global reserves of crude that threaten its power over markets.
Oil prices have risen by around 20% since the 13-nation cartel decided to cut production in November. However, analysts say there isn't enough incentive for oil traders to start emptying storage tanks that grew to record levels in 2016.
OPEC is scrambling to find ways to force stored-oil volumes down to more manageable levels before U.S. producers use the price recovery to kick-start their output.
"It's a bit of a race between the extent to which OPEC can implement its production cuts and how other producers, particularly U.S. shale, respond," Jason Bordoff, director of Columbia University's Center on Global Energy Policy, said.
On Thursday, Saudi Arabia, the world's largest exporter of crude, said it was cutting even more than it had promised to under the OPEC agreement. Its production fell below 10 million barrels a day in January, said energy minister Khalid al-Falih, and will likely decline further in February.
"Our objective is to set the market on an accelerated rebalancing course, " he told reporters at a conference in Abu Dhabi.
Mr. Falih's comments came a day after the U.S. Energy Information Administration said domestic crude stockpiles rose by 4.1 million barrels to 483.1 million barrels in the week ended Jan 6--a much larger rise than analysts had expected.
U.S. oil prices rose 1.65% to $53.11 a barrel after Mr. Falih's comments on Thursday, following several days of losses fueled by concern over high inventory levels and production from OPEC members like Libya that are exempt from cuts.
OPEC officials have long expressed concern about growing levels of stored oil. Crude inventories rose to a record of nearly 1.3 billion barrels in 2016 in the Organization for Economic Cooperation and Development group of industrialized nations, which includes the U.S.
The amount in storage is a hangover from two years of low crude prices that made it potentially profitable for traders to buy petroleum, store it in tanks, ships and even trains and then sell it later when prices rose.
Analysts say all that stored oil is a swing supplier--a role OPEC has long sought to play--meaning it can be released when prices rise and built up when they fall.
"There's no sign that we're drawing down inventories at a particularly rapid clip today, we're not there yet," SethKleinman, a Citigroup analyst, said.
The architect of the output-cut plan, OPEC Secretary-General Mohammad Barkindo, has said inventories are the primary target--not the U.S. shale producers who are often described as the cartel's chief adversary.
The collective reduction of 1.8 million barrels a day--including reductions from non-OPEC producers like Russia--adds up to about 320 million barrels over the six-month term of the deal. That is close to what the cartel says needs to drain out of storage to bring supply and demand back into balance and raise prices.
Oil storage is a more difficult issue in one way for OPEC than shale production: "People genuinely don't know how much of an overhang even exists to begin with," Amrita Sen, analyst at Energy Aspects, said.
While most industrialized nations publish data about oil storage, a growing proportion of inventories are stored in Asian countries that don't publicize that information.
Russia, the world's largest oil producer, stopped publishing information about its crude stocks in 2009. Singapore--a key storage and refining hub--keeps storage numbers secret for refiners who consider the information proprietary.
OPEC has begun pushing countries to disclose more information, largely through the International Energy Forum, an organization that fosters dialogue between oil producers and consumers.
"If you don't get the right information, you can't assess demand," said Yuichiro Torikata, an energy analyst at the International Energy Forum.
No matter where the oil is, OPEC will need to force prices up quickly to move oil out of storage, pushing the market into backwardation--a technical term that means oil is more expensive today than in the future. Storing oil generally only works when traders believe they can sell for higher prices in the future.
"The question is whether the structure of the market is paying you to store or draw," Adam Ritchie, director at OPEC-monitoring company Petro-Logistics SA, said.
Write to Benoit Faucon at email@example.com, Sarah McFarlane at firstname.lastname@example.org and Ahmed Al Omran at Ahmed.AlOmran@wsj.com
(END) Dow Jones Newswires
January 12, 2017 12:18 ET (17:18 GMT)
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