Global crude inventories are running low.
In a recent report, Morgan Stanley said it had calculated that observable crude oil inventories globally had shed some 690 million barrels in 2021 leaving them at their lowest level in more than five years.
The investment bank also commented: “However, with a constructive demand forecast and relatively cautious expectations for Opec+ supply, we expect inventories to end 2022 lower still.”
The International Energy Agency also reported a gap between its global inventory calculations and the actual inventory situation suggesting global crude oil inventories had declined by 200 million barrels more than the agency had estimated.
Various reasons are cited for this but, in essence, it means that there may very be a lot less oil in the world at a time when demand is robust and still growing. With Covid restrictions being lifted in many countries, demand will be further stimulated.
“Tank bottoms are in sight across crude and products worldwide already,” said Energy Aspects, as quoted by Reuters in a report from this week. “There is a growing acceptance that the oil market has few, if any, shock absorbers left.”
Struggling to increase output
OPEC+ members agreed this week to continue adding moderate output increases of 400,000 bpd to its combined monthly output rather than boost additions amid the growing supply worry and higher prices. However, reports suggest that OPEC+ has been failing to meet this group quota for months now with the 23-country cartel struggling with decreasing spare production capacity and Morgan Stanley estimates a potential decline in global spare capacity from the current 6.5 million bpd to just 2 million bpd by the middle of the year.
The IEA also reported that crude oil demand had surprised with higher-than-expected growth during the fourth quarter of 2021 and has revised its full-2022 demand forecast upwards by 200,000 bpd despite anticipating a slowdown in demand growth during Q1 2022.
Competition for product leads to price concerns
Ian Moore from The Oil Market Journal commented: “U.S. refineries have struggled to produce enough distillate over the last year. Outages following the ice storm in Texas during February 2021 along with the hurricane outages in August and September 2021 resulted in a 2021 Q4 stock build of just 7mb compared to a five-year average of 21mb.
“In addition, shipping demand for distillate is growing as the move to low sulphur fuels in 2020 is now resulting in higher demand after COVID interruptions in 2020 masked the transition. This means shippers are competing for the same product as farmers and industry – low sulphur diesel.”
Ian Moore added: “I am deeply worried the ICE Gas Oil future could settle back into the $850-1000/t. trading range seen during 2010-2014.”
OPEC+ seems unphased by inventory updates with its joint technical committee still reporting an expectation of an oil supply surplus for this year, albeit trimming its forecast a little from 1.4 million bpd to 1.3 million bpd. Either OPEC+ is underestimating the global crude oil supply situation, or analysts and observers are overestimating the impact of the decline in global oil inventories and the strength of demand.
To avoid seeing the price of oil head into the $100 plus territory the best hope is that it is a combination of both overestimation of demand and underestimation of supply. The reality remains to be seen.