Saudi Arabia’s reports about declining crude oil inventories were instrumental in the buildup of trust on the market that OPEC’s—and the Kingdom’s specifically—efforts to rebalance crude oil’s fundamentals were working. Now, a satellite imaging company, Orbital Insights, is challenging these reports, suggesting that OPEC’s leader may have well been lying to get prices higher.
While this would not exactly be a surprise, it would throw a stone in the quiet waters of the official OPEC narrative that has played a lead role in several oil price rallies so far this year. And here’s the size of this stone: Orbital satellite data suggests that Saudi Arabia’s crude oil inventories have risen slightly since early 2016—not dropped. A slight rise in itself would normally not be a big deal, but Riyadh has been reporting declines in inventories over this period, to the tune of some 70 million barrels.
But things are not so simple, the FT’s David Sheppard notes. The Orbital Insights data only focuses on above-ground storage tanks. Its satellites collect and analyze images of the floating roofs of these tanks, estimating the amount of oil each holds based on the shadow the oil casts across the top.
Yet, Saudi Arabia stores oil abroad, too, and in pipelines, as well as in underground tanks that cannot be seen by satellites. It is possible that there is less crude oil in storage abroad and underground, and the 70-million-barrel reduction comes from there, but it is just as possible that there is even more crude in Saudi Arabian storage.
What does this say about oil prices? Most bluntly, if the Orbital data are accurate, it says that Saudi officials were not exaggerating when they said they were ready to do whatever it takes to rebalance the market—“whatever” in this case meaning less-than-truthful about their inventories.
If word gets around that the leader of the pack has been less than transparent about its inventories and creating a make-believe scenario of market rebalancing, other pack members might decide to follow its example, which would fulfill the expectations of those skeptics that from the start said that the OPEC deal wouldn’t work because OPEC always cheats.
By Irina Slav or Oilprice.com
