Six months after OPEC started cutting oil output in response to the unfolding economic crisis, its efforts may have sufficiently tightened the market and lessened the need for a further curb. While the economic outlook has depressed equities markets and is keeping a lid on crude oil futures at around $45 a barrel - down more than $100 from a record last year - the picture in physical oil markets is not so bearish. Due in part to lower supply from OPEC exporters, Russian crude oil has gained in value, the fuel oil market in Europe has turned on its head and bulging US crude inventories are starting to be drawn down. The signs of a tightening market suggest the Organization of the Petroleum Exporting Countries, which meets on March 15, may have removed enough supply to match the fall in demand caused by the weakening economy. “OPEC cuts have clearly balanced the market,” said Lawrence Eagles, head of commodities research at JP Morgan in New York. “From a market perspective, the fundamental side, OPEC has done enough. But the economy is still pretty horrible and that's going to limit the upside for oil prices.” OPEC has agreed to remove 4.2 million barrels per day of oil production - almost enough to supply Japan - since September to prop up prices. According to a Reuters survey, four-fifths of those cuts have been delivered. Analysts say one of the clearest signs of a tighter physical oil market due to OPEC's action is the strength in the price of sour crude oils such as Russia's main export blend Urals, a medium sour crude. The more viscous crudes are called heavy and those with higher sulphur content are called sour. Urals' value against benchmark Brent hit a seven-year high in northern Europe last month, according to Reuters data. “The market is tightening under OPEC production cuts, and the first visible signs come in the pricing of heavier and medium crude grades,” said Harry Tchilinguirian, analyst at BNP Paribas. “I think the emphasis will be foremost placed on maintaining the current high level of compliance with current quotas at least this quarter and into the second quarter,” he said of OPEC's meeting in Vienna. New refineries OPEC's curbs have boosted Urals and other sour crudes because many OPEC exporters have focused their output cuts on their normally less valuable heavier crudes that compete with the Russian grade. A trader active on Urals and other sour crudes agreed the sour market had tightened “very meaningfully,” mainly because of Saudi cuts which are focused on its cheapest grades - Arab Medium and Heavy. To be sure, strength in sour crudes is not just a function of OPEC. New oil refineries such as Jamnagar in India are soaking up more of it, analysts say, and more such plants are planned. Still, together with new refining plants that can process fuel oil into more valuable fuels, OPEC's cuts of its mostly high-fuel oil yielding crude have had unusual consequences in Europe's fuel oil market. Fuel oil with 3.5 percent sulphur - used to power ships and normally the cheapest of the key refined products – jumped in Europe to a premium to 1 percent sulphur fuel oil in February and it remains at a premium. A key indicator of whether markets are well or very well supplied for OPEC ministers is oil inventory levels in the world's biggest economies and those have started to take a dent. Commercial crude oil inventories in the United States fell 700,000 barrels to 350.6 million barrels in the week to Feb. 27, a government report said on Wednesday, countering forecasts for an increase. Even so, there is a long way to go before inventories are near OPEC's comfort zone. Officials would like to see the OECD developed economies holding stocks equal to 52 days of demand, not the 57 days they had in December. And OPEC ministers will be mindful when they meet that demand, already falling for the first time in a generation, slows in the second quarter due to warmer weather and may yet decline further. For some, that means a further formal output cut could still be on the cards. “Another cut, in our view, will act as an insurance policy for OPEC in case demand continues to deteriorate, which at this stage is still possible,” said Edward Meir of MF Global.
