Saudi Arabia Wants $70 Oil

February 23, 2018: Saudi Arabia Wants $70 Oil

Saudi Arabia oil plant

As the global oil inventory surplus narrows and the goal of the OPEC cuts is within reach, the oil cartel is mulling a change in the way it defines success, with an eye on keeping the current production limits in place at least through to the end of this year.

Although there were a variety of reasons for oil prices rallying at the end of 2017 and hitting multiyear highs a month ago, the overarching reason was that the inventory overhang significantly narrowed, in large part because of the OPEC cuts.

The IEA says that OECD inventories are now only 52 million barres above the five-year average, a surplus that has shrunk dramatically from 264 million barrels a year ago. “With the surplus having shrunk so dramatically, the success of the output agreement might be close to hand,” the IEA wrote in its February Oil Market Report.

Other analysts have gone further. Citigroup and Goldman Sachs both estimate that the surplus has probably already been eliminated, meaning that the oil market has already reached the long-sought “balance” for which OPEC is aiming.

But as success draws near, oil prices are still not where OPEC wants them. The group is considering changing the way it measures “balance” in the market, for several reasons.

First, what constitutes the five-year average for inventories has changed significantly, with that period of time increasingly encompassing surplus years. The level of inventories that was “average” for the period of 2011-2015 is substantially lower than the “average” for 2013-2017 — the latter period includes more than three years in which the market suffered from a glut.

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