After a year on the defensive and full of false starts, oil bulls have a slate of new reasons to claim the glut is over.
Not only does the Organization of the Petroleum Exporting Countries have a tentative deal to cut output, but it appears bloated global stockpiles may be draining. That could be the key to higher prices.
Some think shrinking stockpiles are as important, if not more important than the OPEC agreement. In advanced industrial economies, crude-oil inventories rose to a record 3.1 billion barrels in July, according to the International Energy Agency. Surpluses like this around the world are so large that have weighed on the rallies sparked by production declines and supply outages.
Many argue a sustained rally above $50 could only come once inventories drain. Now U.S. stockpiles have shrunk for five-straight weeks, down 5%, the fastest rate in two years. Stockpiles at the world’s largest oil-trading hub in Europe have also fallen from August’s record highs, according to data provider Genscape Inc. Floating storage in Singapore nearly halved in the past week after sitting near 30 million barrels for about three months, according to ClipperData.
“That’s ultimately what heals a broken market,” said Dan Pickering, co-president of Tudor, Pickering, Holt & Co. in Houston, who oversees $1.9 billion in investments for the bank’s asset-management arm. “This is what we’ve been waiting for.”
By some calculations, the global oversupply of oil has ended. PIRA Energy Group, at its influential conference in New York Thursday, told a crowd of traders, executives and government officials that the market ran a supply deficit of 500,000 barrels a day last quarter, set to double by year’s end.
If OPEC follows through and cuts production, it could accelerate the decline in stockpiles and extend the recent rally. Mr. Pickering expects prices to rise from $50 today toward $60 a barrel in the next six months. PIRA is calling for prices between $60 and $65 by 2017.
But claims like these have proved false before. A year ago PIRA predicted $75 for 2017 and had to backtrack within a month because of rampant output world-wide. Fears over China’s slowing growth spread further panic and a warm winter damped heating-fuel demand. By the summer, stockpiles did show some declines, then OPEC, Russia and active refiners overwhelmed even record demand for motor fuel.
There are concerns now that the recent drawdown could be an anomaly. Hurricanes and companies trying to avoid inventory taxes at the end of the third quarter may keep exports out at sea only temporarily, analysts said. Refiners also usually slow at this time of year for routine maintenance, which would lead to lower consumption.
“We’re in this delicate teeter-totter,” said Hillary Stevenson, oil markets analyst at Genscape Inc.
North Sea and West African producers have also been putting more oil onto ships in recent weeks, added supply that won’t show up in inventory data, according to Citigroup Inc. Even though the supply-demand balance appears to be tightening long-term, oversupply could get worse in the next month before it gets better, said the bank’s analyst Eric Lee.
U.S. government analysts estimated in September that the global market was still oversupplied by 400,000 barrels a day in the third quarter. The International Energy Agency also said in latest report a month ago that Asian demand was “wobbling” and it downgraded its global oil-demand forecast.
But many analysts are underestimating Asian demand, said PIRA’s head of global oil, Gary Ross. They don’t have good data on private oil refiners in China, known as “teapots,” which are increasingly influential at reshaping global oil markets. And record new car sales are likely to boost Chinese gasoline demand by 10% to 3.1 million barrels a day, according to PIRA.
Chinese customs data also shows rising consumption, a trend five years strong, said Jonathan Berland at Gresham Investment Management LLC. If that type of demand continues while producers are pulling back worldwide, it could lead to “much higher” prices over the next several years, he added.
“The recent draws that we’ve seen reported have reminded the market that demand is healthy,” said Mr. Berland, whose firm manages about $7.9 billion and specializes in commodities. “That is something that the market lost sight of.”