Complex Made Simple

OPEC, Russia spare Asia oil supply cuts in fight to hold market share

* OPEC November to January supply to Asia rises seven per cent

* Supply gain occurs despite OPEC, non-OPEC pledge to cut 1.8 mil bpd in H1 2017

* Oil market still expected to rebalance at some point in 2017


OPEC and non-OPEC producer Russia are shielding Asia from supply cuts agreed in a landmark deal last year as they fight to protect their share of the world’s biggest and fastest growing oil market.

Instead, they have reduced deliveries to Europe and the Americas as they implement a coordinated agreement to cut supply by about 1.8 million barrels per day (bpd), seeking to reduce a global supply glut and lift oil prices.

The Organization of the Petroleum Exporting Countries’ (OPEC) oil supplies to Asia rose by seven per cent between November and January, to 17 m illion bpd, meeting two-thirds of the region’s oil consumption, data from Thomson Reuters Eikon showed.


(OPEC achieves 82 per cent of pledged oil output cut in January)


Under a deal agreed last November, OPEC pledged to cut production by around 1.2 million bpd in the first half of 2017. Other producers, including Russia, pledged to cut another 600,000 bpd.

“For OPEC, and here we mean the Mideast countries, Asia is their core and growing market,” said Tushar Bansal, director at Singapore-based consultancy Ivy Global Energy. “The last thing OPEC … would want is that as they develop newer markets outside the region, some other players like Rosneft or Venezuela increase their market share in what is their backyard.”


A slower pace in Asia

While the OPEC and Russian cuts should eventually rebalance the market after a three-year glut, it will be slower in Asia unless regional demand picks up.

In a sign of ongoing Asian oversupply, Eikon data shows that around 30 chartered supertankers, known as Very Large Crude Carriers (VLCC), are sitting in the waters outside Asia’s oil trading hub of Singapore and southern Malaysia, carrying about 55 million barrels of oil, enough to meet almost five days of Chinese demand.

Asia has been the main source of global oil demand growth for the past two decades as consumption in economically developed nations has stagnated.


(Ministers positive on OPEC, non-OPEC oil output cuts)


Therefore, OPEC has raised its supply to Asia, and Russia has also re-routed a great chunk of its rising production towards China and the Asia-Pacific over the past decade. Russia surpassed Saudi Arabia as China’s biggest supplier last year, exporting 1.05 million bpd of crude versus Saudi Arabia’s 1.02 million.

The increase in Asian deliveries contrasts with OPEC’s global cut of over one million bpd in January, surprising market watchers with a compliance rate of over 80 per cent.

Russia, the world’s biggest oil producer, also said it cut supplies by 100,000 bpd in January.


(Global oil output cut by 1.4mn bpd: Russian energy minister)


“Oil stocks are drawing, especially in Europe. In Asia, strong demand is tightening the market, but it will take time,” said Oystein Berentsen, managing director for crude at oil trading firm Strong Petroleum in Singapore.

For the moment, data from the U.S. Energy Information Administration (EIA) suggests that global markets remain oversupplied, with around 95.8 million bpd of demand being met by 96.4 million bpd of supply.

But given the cuts and an expected demand increase of up to 1.6 million bpd this year, the global market will likely balance this year.