The missing barrels of oil

February 24, 2012

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.

Most crucially, Iran, OPEC’s No.2 producer is under sanctions for its nuclear programme. The country has already seen production fall 5 percent from February 2010 levels.  The supply situation will get worse, as countries trying to cut back on purchases from Iran compete for imports from elsewhere, notably Africa. But there is little spare capacity elsewhere — Goldman Sachs notes that output in Saudi Arabia, OPEC’s biggest producer, is already at 30-year highs.

Now for the demand side. For one, markets are no longer pricing in a complete economic meltdown in Europe or the United States. But far more importantly, Asian demand has been far more robust than anyone expected. That’s where the missing barrels of oil appear to have gone.

In China, despite signs of a weakening economy, implied oil demand has remained strong, with crude imports up 7.4 percent last month to their third-highest level ever. South Korea’s end-January oil inventories were some 4 million barrels below year-ago levels. Asian oil demand is growing faster than markets are pricing in, Barclays says.

No wonder Brent crude is trading at 9-month highs of almost $124 a barrel. Goldman however upped its 12-month forecast for Brent this week– it now predicts $127.50 a barrel and implies this estimate is conservative:

World oil inventories have not been building despite Saudi Arabia pumping at its highest levels in 30 years and Libyan supplies returning to the market…This suggests that the increased supplies have been absorbed by the market and leaves the world in the unprecedented situation in which OPEC spare capacity is at a trough rather than at a peak just as the world economic recovery is getting on a more solid footing.


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