LONDON (Reuters) – U.S. petroleum inventories are gradually normalising as output curbs by OPEC+ and processing restraint by refiners push the oil market back towards balance.

But with stocks of crude and distillates still well above the five-year average, OPEC+ and refiners will need to maintain their disciplined approach until at least March to avoid renewed downward pressure on prices.

U.S. stocks of crude and petroleum products outside the strategic petroleum reserve declined by 11 million barrels last week and have fallen by a total of 96 million barrels over the last 16 weeks.

Commercial petroleum inventories are 7% above the previous five-year average, down from a surplus of 14% in the middle of July (“Weekly petroleum status report”, Energy Information Administration, Nov. 12).

Commercial inventories have fallen in 15 out of the last 16 weeks, a sign the oil market is under-supplied as a result of production cuts by OPEC+.

Under-supply is gradually reversing over-production earlier in the year during the first wave of pandemic-related lockdowns and the volume war between Saudi Arabia and Russia.

Nonetheless, commercial crude stocks are 31 million barrels (7%) above the five-year average while distillate inventories are 19 million barrels (14%) above average.

If the current rate of inventory drawdown is sustained, stocks are likely to return to their five-year average towards the end of February (tmsnrt.rs/36xjnsz).

But that assumes the second-wave of the novel coronavirus and pandemic control measures do not have a further adverse impact on oil consumption over the next few months.

It would be risky for OPEC+ to proceed with its scheduled production increase at the start of next year, which would probably push the market back towards over-production and result in a renewed increase in inventories.

The expanded oil exporters group is likely to defer any output increase to April or July to allow inventories to normalise first.

REFINERY RESTRAINT

U.S. oil refiners continue to restrain their processing rates well below seasonal norms to try to work off surplus product stocks.

The total volume of petroleum products supplied to the domestic market (a proxy for consumption) was 4% below the five-year average last week.

But the volume of crude processed was almost 17% below the five-year average, ensuring refined product stocks continued to draw down.

The gap was particularly large in distillates, with consumption 5% below the five-year average but production down by almost 15%.

Refiners are likely to continue restraining output for the next 2-3 months to bring stocks back to more normal levels.

At that point, the refining system will be entering its normal maintenance season, when crude processing typically reaches its slowest rate in the year.

Once maintenance is finished, however, there is likely to be a rapid acceleration in processing from the start of the second quarter, as refiners end their restraint and try to prevent a further unwanted erosion of stocks.

The prospective increase in processing rates from the start of the second quarter is another compelling reason for OPEC+ to postpone a decision on further output increases for three months until March.

(John Kemp is a Reuters market analyst. The views expressed are his own)