Saudis Face Billion-Barrel Adversary

Saudis Face Billion-Barrel AdversarySaudis Face Billion-Barrel Adversary

Saudi Arabia will face a new billion-barrel adversary even if it wins its struggle with US shale producers over market share.

It will not be additional Iran oil barrels, a resurgent Iraq or long-standing competitor Russia. The answer will be more prosaic: Even when overproduction ends, a stockpile surplus of more than 1 billion barrels built up since 2014 will remain, weighing on prices, Bloomberg reported. Inventories will keep accumulating until the end of 2017, the International Energy Agency forecasts, and clearing the glut could take years.

“We may get to the end of the year, and even though supply and demand are in balance, the market shrugs and says ‘So what?’ because it’s waiting for proof of inventory draw-downs,” said Mike Wittner, head of oil markets at Societe Generale SA in New York. “Moving from stock-builds to balance might not be enough.”

Since it was unveiled in late 2014, Saudi Arabia’s strategy to bring the world’s oversupplied oil markets back into balance by squeezing competitors with lower prices has proved grueling, dragging crude down to less than $30 a barrel last month.

While a gradual decline in US production signals supply will stop growing, the second act of the process may prove the longest as stockpiles slowly contract.

Between late 2014, when developed-world stockpiles were at about average levels, and the end of this year, global inventories will have swelled by about 1.1 billion barrels, IEA data shows.

Another 37 million will be added in 2017. Taking the agency’s projections for how quickly inventories will then fall, and estimates from Energy Aspects Ltd. that 290 million barrels will flow into China’s strategic reserves, it will take until 2021 to clear what’s accumulated.

The latest data from the American Petroleum Institute show the build-up in the US is only getting bigger, with the nation’s crude stockpiles ballooning by 9.9 million barrels last week.

However, inventories could erode as early as this summer because the decline in US shale output will probably be steeper than is widely assumed, according to Vienna-based consultants JBC Energy GmbH, which predicts prices could rebound to $50 a barrel in June.

Much of the surplus the IEA estimates accumulated in the fourth quarter of 2015 has not actually appeared in storage, suggesting the excess is smaller than thought, Standard Chartered Plc says.