OPEC goal of cutting global oil inventories will remain elusive, Morgan Stanley says

The Organisation of Petroleum Exporting Countries' stated aim of cutting excess global oil inventories is likely to prove elusive for some time to come, Morgan Stanley said.

If OPEC wanted to push stockpiles back down to their five-year average, its official target, then the cartel would need to carry out much deeper cuts in its levels of production, the broker said in a research report published on Monday but dated 16 June.

Indeed, just keeping inventories from increasing would require then current output quotas to be extended to all of next year.

Morgan Stanley said inventories would be drawn down throughout the remainder of 2017 - mostly during the third quarter - but only to build again in 2018.

Strong growth in US shale oil output would coincide with rising production from OPEC and Russia after the current output cap agreement expired in the first quarter of 2018, the analysts explained.

To back up its arguments, Morgan Stanley pointed to recent 'data points' which it said were "not encouraging".

Just the week before, the International Energy Agency had said inventory levels within the OECD continued rising at a rate of 620,000 barrels per day in April, which the analysts pointed out was above the seasonal norm.

In parallel, a staggering 1.6m barrel a day increase in the last two weeks had seen onshore stocks gain at a pace of 130,000 b/d.

On top of that, floating storage had been building up at a rate of 0.8m b/d since early May.

Morgan Stanley estimated that observable (OECD, China and select non-OECD countries) inventories stood at roughly 4.13bn barrels at the end of April, or 340m barrels above their five-year average of 3.79bn.

The analysts projected stockpiles would fall to about 4.1bn barrels by the end of 2018.

Hence, barring a "substantial" decline in the US oil rig count or US shale production "rolling over", OPEC would need to continue its current quota for all of 2018 to keep inventories from rising or "much deeper" cuts to push them back to their five-year average.