The oil market currently bears a very different look compared to January 2017 when the 1.8 million b/d OPEC/non-OPEC output cuts were first carried out.
The sudden pace of this transformation has surprised many, and the 24-producer coalition is now touting a proposal to end these cuts and turn on the taps at their oil fields.
Crude supplies on the market have tightened steadily, pushing oil inventories lower, mainly due to strong compliance to the output cuts, which were aided by sharp and unexpected declines in Venezuela, Angola and Mexico, along with strict adherence from Saudi Arabia and Russia.
Amid the growing likelihood that OPEC/non-OPEC will agree to raise output when it meets on June 22/23, some immediate impact could be felt on the physical oil markets.
MORE HEAVY, MEDIUM SOUR CRUDES
Saudi and Russia have indicated there is a reasonable chance an agreement will be reached and this means more medium, heavy sour crudes will be available.
This could put downward pressure on differentials of medium or heavy sour crudes such as Russia's Urals and Saudi Arabia's Arab Heavy, which recently have traded at strong levels.
However, if the group and its allies decide to the maintain the current cuts, the supply of such crudes will tighten even further.
The fall in OPEC/non-OPEC production has coincided with the dramatic rise in US crude output and exports, which has created a huge imbalance between sweet and sour crudes.
If the output cuts are abandoned, and the current OPEC production policy is reversed, there will be more medium and sour crude on the market, which will widen the spread between crudes that are low in sulfur (sweet) and crudes that are high in sulfur (sour).
The physical crude markets have looked fairly balanced in the past few months but there still lies a disconnect between crudes of different quality.
The medium sour crude market globally remains tight, and this trend could intensify if Venezuela's situation worsens.
The excepted loss of Iranian exports towards the end of the year due to the re-imposition of US sanctions will also take away more of this crude from the global balances.
But there is a growing glut of sweet crudes in the Atlantic Basin, as can be seen by the number of unsold barrels of Nigerian crude oil on the market.
The Dated Brent complex, the benchmark for sweet crudes globally, has also softened after it reached a three-and-a-half-year high in mid-May.
IMPACT ON REFINED PRODUCTS
The rise in medium sour crude supply will also increase global supplies of fuel oil, which has been fairly robust and stable in the past month.
Gasoline cracks globally have seen a steady drop in the past month, as the high flat price is putting pressure on the product.
However, the outlook for middle distillates such as diesel and jet fuel, the main profitmaking products of the barrel, remains strong as supply globally remains tight.
The rise in OPEC/non-OPEC output also bodes well for the tanker industry, especially shipowners.
The current production cuts were very bearish for the tanker industry, as they reduced seaborne trade for oil.
But if the policy is overturned, there will be an increase in Saudi and Russian exports, which will create more ton-mile demand and increase activity for supertankers like VLCCs and Suezmaxes.
The International Energy Agency says the market needs a 1 million b/d OPEC production hike in the third quarter to counteract the impact of US sanctions on Iran's oil and further declines in Venezuelan output.
Global oil stocks could see draws averaging almost 400,000 b/d to the end of 2019, an analysis based on the latest projections by the IEA shows.