world oil stockpiles slump

OIL storage tanks held by the world's top consumers, especially the United States, appear a bit empty this summer.

At 2.588 billion barrels at the end of May, inventories of crude oil and petroleum products are now below the five-year average for the first time this year, the International Energy Agency reported. Barring an improbable jump in June, the agency said stockpiles won't make their usual second-quarter rebound.

With sluggish world oil demand, the situation won't necessarily drive higher oil prices. But it could sustain market volatility and shift the pattern of futures prices, making crude for delivery months in the future more expensive than barrels available now.

Benchmark light, sweet crude for August delivery settled 4.1 per cent higher at $US141.65 a barrel thanks to a last-minute surge. This is 95 per cent higher than a year ago.

The increase was the second-largest in dollar terms in Nymex history, and marked the highest settlement since July 3. August Brent crude on the ICE futures exchange settled up $US5.45 at $US142.03 a barrel.

Referring to oil’s recent trading range, Deutsche Bank chief energy economist Adam Sieminski said: “Why is oil at $US135 as opposed to $US100? The answer is inventories are low. Demand projections, despite the high prices, are still climbing. Everybody's worried about supply."

Increasing inventories in the second quarter is an axiom of oil markets. Stockpiles have a chance to build after the Northern Hemisphere winter subsidies and before driving season in the US kick off. What's become more uncertain is the size of the second-quarter build, as consumers in countries such as China and India, who only over the past few years have emerged as significant market drivers, may skew established seasonal patterns.

Theories vary as to why stockpiles are struggling to rise, and no one is suggesting oil consumers will someday awaken to find dry tanks. But smaller inventories mean less insurance against supply interruptions, potentially exaggerating future price moves.

Data available to the market only cover oil stocks held by members of the Organisation for Economic Cooperation and Development, the club of 30 rich countries that consume 56 per cent of the world's petroleum. But with other markets all but opaque, economists use the information as a proxy for world inventory levels.

The IEA, an energy adviser to the OECD, said stocks grew 23.9 million barrels in May, "well short of the typical seasonal increase."

A more up-to-date estimate from the Energy Information Administration said OECD oil stocks swelled by only 36 million barrels in the second quarter ended on June 30, less than half the average gain for this time of year. At 2.572 billion barrels, oil inventories are 88 million barrels lower than last year, the US energy statistics agency said.

In the United States, crude stocks as of July 4 have notched their steepest yearly drop since 1931, EIA data show.

One reason why stockpiles have declined is that global demand keeps rising.

"It reflects that consumption has outpaced production. It's that balance between supply and demand that has helped propel prices upwards," said Tancred Lidderdale, an EIA economist.

EIA projects world demand will grow by 860,000 barrels a day, or 1 per cent, this year, outpacing new supply from outside the Organisation of Petroleum Exporting Countries.

OPEC's decision making a year ago helped create the current situation, said Deutsche Bank's Mr Sieminski. The cartel cut output by a total of 1.7 million barrels a day between November 2006 and February 2007, according to the IEA.

Last November OPEC agreed to raise output by 500,000 barrels a day, and Saudi Arabia has since announced plans to put more than a half-million new daily barrels on the market.

"They see their job as trying to balance the market, and they overestimated non-OPEC supply, so they didn't produce enough oil in 2007," Mr Sieminski said. "As a consequence, inventories fell."

The IEA's report said steady OPEC output through year-end would improve global stock levels, and the Saudis pledge is "insurance" that will come to pass.

Lower inventory levels also reflect bets that consumption will stay weak in the future.

"Refiners are very reluctant to buy at such a high price ... until they are sure demand is picking up," said Ehsan Ul-Haq, head of research at consultancy JBC Energy in Vienna.

There may also be financial incentives to run down inventories.

In its report, the IEA cites anecdotal evidence that refiners have needed to free up capital at a time of thin profit margins. US refiners have been especially squeezed as American drivers restrain themselves this summer.

In a note last week, Goldman Sachs said the price effects of "de-stocking" brought on by constrained credit conditions, weak demand, poor margins and high oil prices have been aggravated by "financial de-stocking."

In this case, speculators are selling off oil futures positions amid concerns over deteriorating demand in mature economies, while index-tracking investors are selling to rebalance their portfolios. This has contributed to a market pattern known as contango, in which oil for delivery months from now sells for more than oil available today.

Crude's contango pattern has raised suspicions that oil inventories are actually not as tight as the statistics suggest, and may be high and building outside the well-lit confines of the OECD.

For example, China's crude oil imports rose 11 per cent in the first half of 2008, preliminary data from its General Administration of Customs showed, though the amount being stockpiled was unknown.

Goldman detects no hoarding going on. Instead, the lower stock figures reflect deliberately lowered inventories.

"This has left the oil system extremely vulnerable to adverse supply and demand shocks, particularly as emerging economies are taking the stocks that are declining in the United States, Europe and Japan," Goldman said. "This underscores the risk of higher price spikes and volatility."