Daily Energy Report
Global oil inventories are high, theExtension of OPEC+ cuts beyond Q1, Oil sector attracts investors, Austria’s Russian gas imports, EU’s EV charging fiasco, Venezuela eyes Guyana land/oil, and more.
Chart of the Day: Global Commercial Oil Inventories are High!
Figure (1) above shows the trend in global commercial oil inventories since 2019. The recent increases are not only bearish directionally but also level-wise. They are too high.
EOA’s Main Takeaway
We warned our clients and readers in recent weeks that inventories were rising and that ruined our original forecasts of a bullish fourth quarter. We were surprised to see China’s inventories rising at a time when they should be declining. It is clear now that everyone, including us, overestimated growth in oil demand in Q4. Therefore, from a fundamental point of view, the decline in oil prices by about $10 should not be surprising.
The above paragraph was regarding the direction of inventories, but what about the level? By historical standards, inventories are high and will keep suppressing oil prices. However, we warned our clients and readers in March 2022 that if Strategic Petroleum Reserves (SPRs) decline below a certain level, commercial inventories would rise to compensate. This conclusion came from earlier research we have done on the topic. This conclusion is important for understanding the market reality: within a certain range, commercial inventories and the SPR are substitutes. This also proves the point that the SPR is a subsidy to the oil industry.
The bottom line is that while global commercial inventories have been rising directionally, and that is a concern, the high inventory level may not be that high once we consider the substitutability between commercial inventories and the SPR. But we should remember this point: A high level of the SPR has no impact on oil prices but a higher level of commercial oil inventories affects prices.
Story of the Day
Saudi Energy Minister Prince Abdulaziz bin Salman affirmed that OPEC+'s oil production cuts could extend beyond the first quarter if necessary, and he assured that the recently announced cuts of more than 2 mb/d would be fully implemented. Despite oil prices not rallying as expected after the OPEC+ meeting, the Prince remains confident that the promised cuts will be effective in addressing the usual inventory build in the first quarter.