Global Oil Inventories Are Exceptionally Tight: Kemp
Global petroleum inventories are the tightest for years in a sign the market is overheating, as the global economy recovers rapidly from the coronavirus pandemic and major oil producers refuse to increase output faster.
Commercial inventories held in the countries of the Organisation for Economic Co-operation and Development (OECD) totalled 2.68 billion barrels at the end of December 2021, down from 3.21 billion in July 2020.
Since peaking after the first wave of coronavirus infections in 2020, inventories have fallen at the fastest rate for decades, and ended last year at the lowest seasonal level since 2013.
OECD commercial inventories ended December roughly 8% below the previous five-year seasonal average, with or without the pandemic year, based on data from the U.S. Energy Information Administration (EIA). There is no precedent for such rapid depletion of stocks in recent decades and the EIA estimates stocks have fallen further in January and February (“Short-term energy outlook”, EIA, Feb. 8).
The result has been a surge in both nearby oil futures prices and calendar spreads, reflecting concerns about the availability of sufficient oil. Front-month Brent futures prices have climbed roughly 25% in the last two months, as the latest wave of coronavirus infections has ebbed and had limited impact on global economic growth or oil consumption.
Brent’s six-month calendar spread, which is closely correlated with stock levels, has surged into a backwardation of more than $8 per barrel this week, within the 99th percentile for all trading days since 1990.
The current combination of rapidly escalating front-month futures prices and backwardation is the most bullish since at least 1993.
Overheating
Low and falling inventories are a sign of excess demand and inadequate supply, putting continuous upward pressure on prices.
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