Saudi Arabia’s energy minister said it is premature to discuss any changes to the OPEC-led supply cut pact as market rebalancing is unlikely to happen until the second half of 2018 even with the current outage of the North Sea Forties pipeline.
Any potential exit from current cuts would be done gradually once the market returns to balance but drawing down inventories will still take more time, Khalid al-Falih told Reuters on Wednesday.
“We haven’t seen any major declines in inventories that we didn’t expect. As we said last month, we still have approximately 150 million barrels of overhang, and it is going to take the second half 2018 to draw that down,” Falih said.
“We expect the first few months of 2018 to be either flat or a build (in inventories) as it is typically the case with the seasonality with the oil market especially on the demand side,” he said in an interview in Riyadh.
“So I think it is premature to discuss any potential changes in our course, and the earliest opportunity to assess where the market is in a major way would be in June.”
OPEC and 10 other producers led by Russia last month extended an agreement to cut oil production by 1.8 million bpd until the end of next year.
The alliance is targeting the elimination of an oil glut to bring global oil inventories back to the industry’s five-year average.
Crude prices firmed on Wednesday, supported by a larger-than-expected drop in US inventories and the continued outage of Britain’s North Sea Forties pipeline system.
Falih, who holds the OPEC presidency this year, said he does not expect the shutdown of the key North Sea pipeline to affect supply significantly.
Russia, which this year reduced production significantly with OPEC for the first time, has been pushing for a clear message on how to exit the cuts so the market doesn’t flip into a deficit too soon, prices don’t rally too fast and rival US shale firms don’t boost output further.
Falih said he is in continuous discussions with his Russian counterpart Alexander Novak and that “Russia sees the benefit of continuing to cooperate.”
“All producers – whether companies and countries – have benefited significantly from the course of action that we have taken and therefore they would benefit from continuing the course but not beyond reaching balance,” Falih said.
“I think once we reach balance we will need a gradual, deliberate, measured and thoughtful way of exiting and making sure that supply is always there for the rise in demand.”
He said that global growth in demand is expected to remain healthy next year in Asian markets like China and India as well as in the United States and Europe.
Oil traders say that rising US crude production, which has soared by 16 percent since mid-2016 to 9.8 million bpd, was capping prices.
Most analysts expect US output to break through 10 million bpd soon, which would be a new record and take it to levels on a par with the world’s largest producers Saudi Arabia and Russia.
Falih said that even with the extra supply coming from the United States that will not slow “the momentum of rebalancing” on the back of healthy demand growth projections in 2018.
“I don’t expect that balancing to be achieved in the next few months, certainly not in the first half, and I think we will have plenty of time to monitor and discuss by the time we get together in June.”