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from Global Investing:

The missing barrels of oil

Where are the missing barrels of oil, asks Barclays Capital.

Oil inventories in the United States rose sharply last week, with demand for oil products  such as gasoline at the lowest in 15 years and crude stockpiles at the highest since last September. Americans, pinched in the wallet, are clearly cutting back on fuel use.

But worldwide, the inventories picture is different -- Barclays calculates in  fact that oil stocks are around 50 million barrels below the seasonal average. And sustainable spare capacity in the market is less than 2 million barrels per day. What that means is that the world has "extremely limited buffers to absorb any one of the series of potential geopolitical mishaps." (Barclays writes)

A big difference from the picture at the start of 2012. With the global economy weak, analysts predicted OPEC would need to pump 29.7 million barrels per day in the first quarter, more than a million barrels below what the group was actually pumping. Logic dictates inventories would have started to build.

But since then conflict in Syria, Sudan and Yemen has removed a combined 1.2 million barrels per day of non-OPEC crude, Barclays says. There have been some problems with North Sea output.

from Global Investing:

Equities — an ‘even years’ curse?

Are global equity markets under an 'Even Years Curse' that sees them underperform bonds in even-numbered years but beat fixed-income returns in odd-numbered ones? After some number-crunching, Fidelity International's' director of asset allocation Trevor Greetham suspects so.

"It's not just hocus-pocus but to do with global inventory levels," he explained at a forum organised by the London-based investment house.

from Commentaries:

OPEC accommodates investor demand

By keeping production targets unchanged despite swelling inventories and uncertainty about the outlook for oil consumption, OPEC has decided to accommodate rather than fight investors' demands for a high level of inventories.
Forward cover has crept up to 62 days, well above the long-run average of 52-53 days OPEC members have previously indicated is their target, consistent with stable prices. But further cuts were never seriously on the agenda at this meeting, and seem unlikely to be seriously considered at the next one in December unless there is a shift in sentiment and a price collapse in the meantime.

 
While spot prices are less than half last year's peak, they have rebounded to a level that was unprecedented before 2007. Ministers must be amazed at their good fortune, with prices at historically high levels amid the deepest global downturn since World War Two.

from Commodity Corner:

Oil Market Contango Widening

0709-contango-fig-11The spread between front-month oil futures and contracts for later delivery on the New York Mercantile Exchange (see Fig. 1) has widened dramatically this month. (See Fig. 2)0709-contango-fig-2The widening contango frequently portends a rise in inventories. For example, in Fig. 3, it can be seen that when the discount for fronth-month crude to second-month crude widened to near $4 a barrel earlier this year, inventories jumped to 19-year highs. The relationship between inventories and the outright futures price can be seen in Fig. 4. 0709-contango-fig-30709-contango-fig-41

from John Kemp:

Doing the inventory swing – Sources of GDP growth in the year after recession

With a lot of fog drifting across the analytical battlefied, we need to start distinguishing between two statements:
 
(1)  The economy is approaching the cyclical trough;
 
and
 
(2) A strong sustained recovery is set to get underway. 
 
There is good evidence to support proposition (1), but it does not necessarily imply proposition (2).  It is possible to be optimistic the worst of the downturn may now be over (or very nearly so) while remaining cautious about the prospects for recovery when the cyclical turning point is passed. 
 
To understand the point, think back to the last recession.   The National Bureau of Economic Research (NBER), official arbiter of the U.S. business cycle, dates the cyclical trough to November 2001 (eight months after the peak in March 2001 -- and just two months after the attack on the World Trade Centre in New York).  But it was not until more than two years later that there were signs of a strong and sustained recovery. 
 
The fitful nature of the expansion during 2002 and 2003 is why the Fed kept rates low for so long.  In fact, the Fed was still cutting interest rates to 1% in June 2003 because the expansion was so anaemic, and did not feel confident to begin raising them from this ultra-low level until June 2004.   Uncertainty caused by impending war between the United States and Iraq was one factor holding the expansion back, but not the only one.  The recovery failed to become "self-sustaining" for almost three years.  
 
The same could easily happen again. 
 
The attached chartbook is an attempt to look beyond the downswing of the cycle at how the U.S. economy behaves in the first twelve months of recovery.

 
First a quick technical digression. As I have explained before, the national income and product accounts (NIPAs) of which gross domestic product (GDP) is the focal point add up domestic production in three ways:  by summing expenditures, by summing incomes, and by summing production. 
 
In analytical terms, the three approaches are identical (for every unit of output there are corresponding incomes and expenditures).  But as a practical matter, it is far easier and faster to estimate GDP by adding up expenditures and working back to income and output.  The federal government makes separate estimates based on incomes and output when tax returns and the quinquennial business surveys become available later (and then has to adjust all the measures to try to make them consistent). 
 
The only problem with this expenditure --> output approach is the need to adjust the data to take account of items produced in one period but consumed in another (ie changes in the amount of produced but unsold raw materials, work in progress and finished products held by manufacturers, distributors and retailers as "inventories"). 
 
Inventories are one of the most volatile components of the output-income-expenditure system and a key driver of cyclical behaviour. 
 
For analytical purposes we can separate GDP growth into two components: 
 
Growth in GDP = Growth in final demand (consumer spending + business investment + government spending + exports - imports) + Change in the Level of Inventories. 
 
Large inventory changes are usually unsustainable and tend to be quickly reversed.  A large build up in inventories one quarter is normally followed by an equally sharp decline in the following one (see Chart 3 in the chartbook). 
 
Charts 1-3 and Table 1 look at how these three measures (headline GDP, final demand, and inventories) have behaved on a quarter-to-quarter basis since 1948.  For clarity, I have reported all growth rates as simple quarter-to-quarter rates, rather than the quarter-to-quarter annualised ones that are normally used by the Bureau of Economic Analysis, since this is more useful for the type of quarterly analysis we are looking at here.  I have reverse engineered the annualised data by the simple expedient of dividing by four -- which is not strictly accurate but good enough for our purposes here, especially since the percentage changes are small. 
 
The immediate point is that headline GDP and final demand are much more stable than the inventory component.  Headline GDP and final sales have been negative in only 37 and 35 quarters respectively out of a total of 245 since 1948.  In contrast, inventory changes subtracted from GDP about half the time (119) and added to it roughly as often (126). 
 
Of the two main components, final demand was slightly more stable than GDP (reflecting the volatility of inventories).  The average increase/decrease in headline GDP between one quarter and the next (ignoring signs) was 1.06 percent, a slightly larger change than the average change in final demand (0.95 percent).  Headline GDP changes have a slightly higher standard deviation (1.03 percentage points) than final demand (0.85 percentage points) confirming that headline GDP is more variable. 
 
Before anyone points out inventories (with a mean change of 0.48 percent and standard deviation of 0.67) are more stable than either -- this appears true, but recall that inventories are only a very small component of GDP and this is the contribution which they make to the total growth/fall each quarter -- so they are actually a source of enormous volatility for their size. 
 
Armed with this understanding, we can start to analyse the recessions since 1948. 
 
I am going to divide them into two groups. 
 
The first group is "severe recessions" in which FINAL DEMAND fell for at least two consecutive quarters.  There are four of these ending in 1954, 1974, 1982 and 1991 respectively. 
 
The second group is "other recessions" where final demand remained positive (most of the time) but the economy was pushed into recession (two or more quarters of negative growth) by changes in the inventory component.  There are five of these "other recessions" or "inventory recessions" ending in 1949, 1958, 1960, 1970 and 2001 (1960 and 2001 do not strictly fit the pattern since there were at least two quarters of negative growth but not consecutive, but they are near enough to be included and both are generally regarded as being recessions). 
 
So now we have our "deep recessions" and "inventory/other recessions", we can look at how the economy behaved in the four quarters after the cyclical trough was reached in terms of both growth in final demand and inventory rebuilding. 
 
There are crucial differences. 
 
In the case of deep recessions, recovery was led by final demand.  Inventory rebuilding played a role, but only after a lag.  After all four deep recessions, inventory changes actually subtracted from GDP growth in the first quarter after the recession was officially over.  They made a small positive contribution in the second quarter of the recovery in three of four cases, but only a modest one.  It was not until the third quarter after the recession ended that they gave a significant boost to GDP. 
 
The pattern after inventory/other recessions is very different.  In four of the five cases, inventories made a positive contribution to GDP in the first quarter after the recession ended (the exception was the anaemic recovery after the 2001 recesssion, and the lack of a stronger inventory response here may have contributed to the failure to achieve self-sustaining recovery in this case).  The inventory-driven recovery fell away somewhat in the second quarter before becoming more resurgent in the fourth.  In contrast to the deep recessions, growth in final demand was much less important in the early months of recovery, with inventory rebuilding supplying most of the initial impetus for expansion. 
 
To summarise, recoveries from deep recessions are led by final demand, with inventory rebuilding not providing a significant source of stimulus for six months.  In contrast, recoveries from inventory/other recessions are led by inventory rebuilding, with final demand playing a more limited role until later, though the initial boost from inventories can dip in the second and sometimes third quarter after recovery begins. 
 
So what type of recession and recovery are we in this time? 
 
A quick look at Chart 2 reveals that the current recession is a deep recession that has seen significant destruction of final demand.  So it is part of group 1. 
 
If this is the correct characterisation, inventory changes might play only a limited role in the early stages of the recovery.  Assuming the economy hits the cyclical trough at the end of Q2 or sometime in Q3, inventory changes might not play a significant stimulative role until Q1 2010. 
 
One caveat:  our sample size of post-1948 recessions is very small, so we should be careful about drawing strong conclusions. 
 
But the experience of inventory-driven and final-demand driven recessions over the last sixty years suggests we should be cautious about pencilling in a strong inventory-driven rebound in H2 2009.

from John Kemp:

US refining system (week ending 29 May 2009)

Crude inventories built (+409,000 b/d), according to the EIA, defying market predictions of a decline (-200,000 b/d).  Imports jumped (+868,000 b/d) to the highest level for four weeks (9.646 million b/d). 
 
Higher crude arrivals were recorded into the PADD III Gulf Coast refining region (+558,000 b/d) and PADD I North-East (+195,000 b/d). But this merely reversed the previous weakness, taking import rates back to year-ago levels, after several weeks in which arrivals had been unusually low.  PADD V West Coast arrivals also rose (+293,000 b/d) but were partly offset by slower imports into PADD II Midwest (-126,000 b/d). 
 
Refinery operating rates continued to rise (+1.15 percentage points) to the highest level this year (86.26%) though rates remain far below last year's level (89.72%). 
 
BUT the jump in refinery operating rates WAS NOT accompanied by an increase in the volume of crude processed.  In fact, crude throughput actually fell marginally (-8,000 b/d).  Instead, non-crude inputs jumped sharply (+203,000 b/d).  The percentage of crude oil in total refinery inputs fell to its lowest level for since mid-Jan and before that for any time in the last five years.  Crude oil inputs accounted for just 96.60% of all refinery inputs last week, down from 98.00% the previous week.  Refiners must have drawn down stocks of other, semi-processed, oils.  But the series is volatile and week-to-week variations tend to reverse rapidly.  Other things being equal, next week should see a sharp increase in reported crude oil processing rates. 
 
Reported gasoline inventories fell (-31,000 b/d).  The substantial gap between reported inventories (-31,000 b/d) and the change (+726,000 b/d) implied by domestic production + imports - product supplied points to continued strong exporting and/or recording errors (-757,000 b/d). 
 
Domestic production fell (-581,000 b/d) and imports slowed (-56,000 b/d) more than offsetting weaker consumption in the holiday-week (-518,000 b/d).  Gasoline stocks were broadly unchanged (203.202 million bbl) down 5.888 million bbl  (-2.8%) compared with last year (209.090 million bbl).  Stocks are relativley low and firmly in the bottom half of the five-year range. 
 
There was no relief on the distillate side.  Stocks continued to build (+237,000 b/d), amid little change in production or imports from the prior week and slackening consumption.  Ultra-low sulphur stocks in PADD I North-East, already +5.664 million bbl (+41%) higher than last at a record 19.976 million bbl continued to trend higher.  Stocks are also far above year-ago levels in PADD II (+4.379 million bbl, +19.5%) and in PADD III (+8.652 million bbl, +42.7%). 
 
In a development that should also worry refiners, stocks of semi-processed "unfinished oils" and miscellenaneous "other oils" continue to rise -- in the case of "other oils" inventories rose +3.600 million (+2.3%) to another record (158.600 million bbl).  The overhang of such "other oils" is now +20.500 million bbl (+14.8%) higher than at the same time last year (138.100 million bbl). 
 
While crude oil inventories look high, the massive stock of refined products, other than gasoline and residual fuel oil, is even larger. 
 
For graphical analysis of this week's EIA report on inventories, production, imports and exports of crude oil and refined products see the links below: 
 
http://graphics.thomsonreuters.com/ce-insight/US-REFINING-SUMMARY.pdf
http://graphics.thomsonreuters.com/ce-insight/EIA-INVENTORIES.pdf
http://graphics.thomsonreuters.com/ce-insight/EIA-CUSHING.pdf
http://graphics.thomsonreuters.com/ce-insight/EIA-PRODUCTION.pdf
http://graphics.thomsonreuters.com/ce-insight/EIA-REFOPRATE.pdf
http://graphics.thomsonreuters.com/ce-insight/EIA-REFTHRUPUT.pdf
http://graphics.thomsonreuters.com/ce-insight/EIA-IMPORTS.pdf
http://graphics.thomsonreuters.com/ce-insight/EIA-EXPORTS.pdf

from Commodity Corner:

Correlation Between Oil and Equities Markets

oil-vs-stock-market

Oil prices have been trading in an unusually strong positive correlation with equities markets over the past few months on hopes that signs of an economic recovery could mean a boost for energy demand.

But with oil and product inventories swelling and little sign of demand improving in the United States and other big developed economies, analysts warn that the linkage may be hard to maintain, especially if U.S. motorists cut back on vacations this summer.

from MacroScope:

“Tinny” signs of recovery

One of the most significant comments about the world economy this week may have come from Klaus Kleinfeld, the chief executive officier and president of Alcoa, America's largest aluminium producer. Amid the reporting of  pretty horrible earnings  -- a $497 million net loss versus a year-earlier gain of $303 million -- Kleinfeld said things may not get much worse.

"There are some signs in many of our end industries for a bottoming out," he said.

from Commodity Corner:

Rising crude levels test Cushing storage capacity

  Falling U.S. fuel demand due to the recession is building inventories and testing capacity limits at the key Cushing, Oklahoma crude storage hub. Crude Storage Levels at Cushing OK

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