The oil market is recovering

Oil inventories have been worked down and beginning to return to historical normalised levels, driven by a mix of robust demand growth on the one hand and concerted efforts by OPEC plus friends to cap production on the other.

While 12-18 months ago heightened geopolitical tensions and operational outages barely moved oil prices, such events are now needle moving news. The outage of Forties at the end of last year and intermittent headline grabbing conflicts in Libya which cause temporary spikes in oil prices are case in point.

However, RBC argues that understanding the breakdown of the inventory story is critical. Data shows that Asian inventories have been worked down which is key for “pulling” crude out of the Atlantic Basin. On the other hand European storage remains in surplus but the clearing of the Atlantic Basin will support drawdowns of European inventory.

Source: RBC Capital Markets, March 2018

It is therefore clear that while the global picture is moving in the right direction, there remains pockets of over and under supply in different regions. The clearing of North Sea crudes, which will be demonstrated by stronger pricing of regional blends such as Ekofisk vs. benchmark is therefore a secondary data point to monitor together with inventory levels for the next step of the global rebalancing story.