Which Way Next For Oil: The Case of the Missing Inventory

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Everyone likes a mystery, right? Usually they are confined to the pages of a good novel, and when the book closes, so does the significance of the story. But, according to Reuters’ John Kemp, a mystery is playing out in the oil import statistics that could have ramifications for all of us, as the answer will dictate the direction of oil prices.

In an article this week, Mr. Kemp explains that very significant volumes of oil shipments were canceled, deferred or diverted at the end of last year from arriving at US Gulf Coast ports in November and December and the exact whereabouts of those cargoes are not precisely known. The figures quoted are for one of the five regions for imports in the US controlled by the U.S. Petroleum Administration for Defense Districts, known as PADD. The Gulf Coast is the largest and is known as PADD III. Some shipments may have been diverted to the buoyant Asia markets where they will either have been consumed or increased stocks. Depending on the destination, which of these two fates can be difficult to see as reporting procedures are opaque. Some of the cargoes were simply deferred and landed in January; indeed, in the week ending Jan. 14, PADD III saw a massive stock build of 6.9 million barrels, according to the EIA. Crude arrivals accelerated by 576,000 bpd (up 12 percent) to 5.4 million bpd, the fastest rate of unloading since late October. PADD III stocks normally rise during January and February, and carry on building in March and April. But last week’s reported build was an outlier, says John Kemp. The 6.9 million barrel stock increase in one week was almost as much as the region normally sees in the whole Jan-Feb period on average (7.4 million barrels) and is almost half the biggest total build (11.3 million barrels) ever recorded since 1981.

During November PAD III stocks dropped by a massive 30 million barrels, partly due to the 18.3 million barrels of deferred shipments, but also due to 8.5 million drawn down for refining. Stocks of refined products have also fallen in the last quarter of the year, both in Europe and the US, resulting in a reduction in forward demand cover from 59.1 days to 58.7 days.

The point here (and the mystery in the tale) is what happened to those 18+ million barrels of oil. It represents some two days of Saudi output of comparable US imports and is a sizable volume of oil. If it has been consumed it suggests the market is tightening faster than thought and Saudi Arabia’s position that OPEC has the world adequately supplied is underestimating the situation. The falling stock position has been what is helping propel the oil price back towards $100 per barrel. So the oil market is holding its breath to see if the draw-down at the end of 2010 continues or the inventory build seen last week is the start of a new trend. The answer could show the way for oil prices in the first half of 2011. The problem is, finding out what happened to that 18 million barrels will be particularly hard to find out if the portion that was diverted to Asia has been consumed (implying the market is tightening) or has gone into store (implying the market is in balance). The latter would suggest the market remains capped at $100 per barrel, the former that we could be in store for $120/barrel and all that price will entail for the transport sector, for inflation and importers’ balance of payments.

–Stuart Burns

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