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.
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.
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.
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.
Looking at the MSCI All World Equity Index, Greetham found equities generating a 69-percent return over the 12-year period starting from 1998. Breaking this down into odd and even years, equities went down by 30 percent in even years, and up by 143 percent in odd years.
On an annualised basis, growth was 4.5 percent, down three percent in even years and up 7.7 percent in odd-numbered years.
Compared against the JPMorgan Government Bond Dollar Index, equity returns beat bonds by 13 percent per annum on an average compound basis during odd-numbered years. In the even-numbered years, global stocks underperformed bonds by 15 percent.
from Commodity Corner:
Correlation Between Oil and Equities Markets
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.
Is not the recent increase in the cost of oil more to do with the reduction in the value of the US Dollar against a basket of currencies than a simple link between the oil price and equities? Each percentage point reduction in the US Dollar appears broadly equivalent to $4 increase in the cost of oil. The reduction in the value of the US Dollar against other currencies appears more to do with the loss of safe haven status of the US Dollar due to equities doing better so investors are moving out of the US Dollar into riskier investments. I would expect the US Dollar to lose value as the economic situation improves, but the journey is likely to be very bumpy. I personally would be very cautious about investing in oil unless you have very deep pockets, as there may be further surprises in store that result in the oil price going down to around $45 a barrel or lower before resuming an upward trend.
