OPINION: Is the market really flooded with surplus oil?

Published November 23rd, 2015 - 11:03 GMT

Nearly three billion barrels of crude petroleum and refined products are being stored by oil firms in the advanced economies according to the International Energy Agency (IEA). Commentators have seized on the three billion figure as a shorthand way to convey how oversupplied the oil market has become. Large round numbers exert a powerful pull on the imagination but shorn of context they are meaningless and apt to confuse rather than illuminate. The statistic is technically accurate but the way in which it is being employed by analysts and journalists is hugely misleading. It would be more helpful to report the change, which is 240 million barrels, or nine per cent, over the last year.

The three billion barrels figure being widely quoted is actually for a relatively small subset of the total crude and products being stored.

Global stocks of crude oil and refined products are probably at least double this figure, at more than six billion barrels. Oil producers, traders, pipeline operators and refiners held crude and products stocks in the OECD (Organisation for Economic Co-operation and Development) countries amounting to 2.989 billion barrels in September, according to the IEA ("Oil Market Report" November 2015).

But the figure excludes government-controlled stocks in the OECD, private and government stocks in emerging markets, oil in transit by tanker, as well as all stocks held by wholesalers and end-users. OECD governments controlled a further 1.581 billion barrels of oil and refined products stocks as emergency reserves, taking total stocks on land in OECD countries to almost 4.6 billion barrels, according to the IEA. Developing countries tend to hold smaller stocks in private and government-controlled storage but they account for half of global oil demand and could easily be holding another one billion barrels of stocks. China, for example, is thought to hold more than 200 million barrels in its government-controlled Strategic Petroleum Reserve ("Oil Market Report" September 2015).

If refiners in emerging markets hold the same operational stocks on site as their counterparts in the advanced economies, there are likely to be at least another 500 million barrels in private storage in developing countries.

The impression is sometimes given that stocks are sitting idle waiting for an upturn in demand before being consumed, but holding large volumes of stock at all points in the supply chain is an operational necessity. The entire supply chain was illustrated in a study by the US National Petroleum Council "US Petroleum Product Supply: Inventory Dynamics" in 1998. Looking at just the commercial and crude stocks reported by the IEA, oil refineries typically want to hold crude oil on site in their tank farms equivalent to around six-10 days worth of processing.

Tank farm storage gives the oil time to settle, permits optimal blending, and enables the distillation units to be fed continuously, while protecting against any delays in fresh crude arriving. Global refineries process more than 80 million barrels of crude every day which implies they need around 500-800 million barrels in storage for immediate operational needs.

In addition, well over a billion barrels of oil and refined products are moving from oil fields to refineries and then to bulk distribution terminals every day via tankers, pipelines, barges and railroad tank cars. In the United States alone, there were almost 100 million barrels of crude oil in transit by pipeline, railroad tank car and barge in March 2015, all of which are counted in commercial crude stocks by the US Energy Information Administration (EIA).

Refineries also hold hundreds of millions of barrels of partially refined oil as part of their operations, and there are hundreds of millions of barrels of refined fuels ready for shipping to customers.

The volume of crude and products in commercial storage on land in the OECD is important because it is one of the most flexible parts of the storage system. It is also one of the most visible parts of the supply chain where changes in stock levels are most likely to be reported.

OECD commercial storage is where any imbalance between supply and demand in the global oil market is most likely to show up.

But the problem with quoting the three billion figure is that that without proper context it gives the impression the world is drowning in surplus oil, which is grossly misleading. The stock of crude and refined products in commercial storage in September 2015 was 241 million barrels higher than in 2014, 274 million higher than 2013 and 239 million higher than 2012.

Oil prices are set at the margin, so the 240 million barrel increase in commercial stocks over the last 12 months has significantly depressed prices. But it is much more useful to focus on the rate of change rather than the absolute level of stocks. The three billion figure should be banished from serious analysis, or at least put into a proper context.

By John Kemp

The writer is a Reuters columnist. Views expressed by him are his own and do not reflect the newspaper's policy.


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