Global Investing

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.

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.

The inventory cycle typically lasts about two years. ‘Up’ years are good for company profits and equity prices with the inverse true when inventory levels are being drawn down. And over the last decade, Greetham notes, the ‘stocking up’ years have been odd-numbered calendar years while inventory draw-down years have been even-numbered ones.

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.