Questions over stocks driving oil prices

Taking stock of the oil market these days can get complicated, especially when it comes to—well, oil stocks.

First, there is the International Energy Agency, which apparently has gotten fed up with being the whipping boy on tracking crude oil inventories.

IEA's complaint

In its April oil market report, IEA takes issue with some producers within the Organization of Petroleum Exporting Countries for referring to the agency's supply-demand balances as justification for the group's decision to cut output quotas by 1 million b/d as of Apr. 1.

IEA contends that its widely watched market report category, "call on OPEC plus stock change" is merely the amount of crude oil necessary from OPEC and/or implicit stock changes to balance world demand supply (after factoring in global demand minus non-OPEC supply).

"As such, the 'call [on OPEC plus stock change]' does not reflect actual or anticipated OPEC production, [Organization for Economic Cooperation and Development] and non-OECD stock changes, or adjustments to [the] 'miscellaneous to balance' [category]," IEA said. "Nor does it represent the actual amount of oil needed to keep the market adequately supplied."

In fact, says the agency, it is "misleading" to ignore seasonal stock adjustments and developments in the "miscellaneous to balance" category.

"IEA balances suggest a second quarter 2004 drop in the 'call on OPEC' of around 1.9 million b/d"—a cut associated with a 2 million b/d seasonal drop in demand. But, the agency says, the recent low stock environment amplifies the need for a strong second quarter stockbuild. So that 1.9 million b/d cut in the call on OPEC crude is largely offset by the need for a normal stockbuild in the second quarter.

Tracking wrong stock target

Meanwhile, the London-based consultancy Centre for Global Energy Studies similarly offers some instruction on the topic of crude oil inventories to Saudi Oil Minister Ali I. al-Naimi in its mid-April global oil report.

Citing press quotes of Al-Naimi as claiming that the margin between high oil prices and low oil prices is a mere 40 million bbl—the spread between US crude stocks at 270 million bbl (when prices are said to rise) and at 310 million bbl (when prices are said to fall), CGES notes that, in fact, at the end of March, US crude stocks stood at 294.3 million, only 5% shy of the low-price threshold, and yet West Texas Intermediate topped $35/bbl. And, in fact, WTI has been increasing "relentlessly since September 2003, despite crude oil inventories first falling and then rising."

One important distinction to make here, says the think tank, is that it's not the absolute level of inventories that counts but the number of days of forward stock cover for refiners. Forward cover has remained roughly at an average 18.5 days since last fall.

Further, it is even more important to focus on the level of refiners' desired inventory cover, says CGES. And that "requires an understanding of what refiners both in the US and elsewhere are thinking, what consumers have in mind, and what is preoccupying the hedgers and speculators in the various oil futures exchanges."

For WTI to plunge to, say, $25/bbl by the end of June, US crude inventory cover would have to jump to 21.5 days, or to about 340 million bbl total.

That just isn't going to happen, says CGES.

Bear signs

Hold on. Energy Security Analysis Inc., Wakefield, Mass., contends that unless crude stocks—especially in the US—are depleted in the next couple of months, when the gasoline rally is over, "crude prices are bound to fall."

ESAI Managing Director Sarah Emerson notes that the biggest-impact crude oil exporters of late have been Saudi Arabia, Iraq, Nigeria, and Venezuela. And US imports from all four are below their 2000 and 2001 marks.

"Looking forward, if all four countries could meet expectations, then US crude imports would have a good chance of exceeding 10 million b/d, meaning refiners could get through the driving season without a significant reduction in inventories," she said.

Of course, looking at the geopolitical risks centered on those four countries today, that's a mighty big if. Pardon the stock answer.

(Author's e-mail: [email protected])

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Latest Prices as of Apr. 19, 2004

IPE prices unavailable for Apr. 12 with London markets closed for public holiday.