“They should have cut another million barrels a day for ninety days in order to drain the system,” said Gary Ross, global head of oil at PIRA Energy, a forecasting and analytics unit of S&P Global Platts.
For Ross, the producers missed an opportunity to deepen cuts between June and August when refinery demand is higher and so accelerate the decline in inventories. Such a move would have pushed the market into backwardation, when near-term prices are higher than those for later months. That structure favors OPEC because it would discourage their shale-oil rivals from locking in prices for future production.
Ross’s view was echoed by analysts at Sanford C. Bernstein Ltd., who said OPEC needs to cut deeper for longer to restore inventories to normal levels. “OPEC needs to drain by 34 million barrels a month or 1 million barrels a day for the next 10 months,” the analysts wrote in a note. “This looks challenging.”
Ross also warned that Chinese crude-demand growth is set to decrease in the second half of this year. “That poses a real problem for OPEC as they enter 2018,” he said.