In the April edition of its Oil Market Report, the IEA left its 2012 forecasts for demand, non-OPEC liquid supply and OPEC NGLs unchanged. As a result, the call on OPEC crude was left unchanged at 30.1mmb/d. However, OPEC production in March increased a further 0.1mmb/d to 31.4mmb/d leaving the market oversupplied by well over 1mmb/d prospectively.
Were OPEC production to remain flat at March levels, we calculate that OECD days forward cover could end the year at almost 62 days, the highest since 2Q95 and probably not consistent with Brent above USD 100/bbl.
We view this data set as further confirmation that the market is transitioning from a two-year period of under-supply to one of substantial oversupply. That view was strongly echoed in the IEA’s editorial comment, we believe.
Moreover, the inventory data are starting to reflect the excess supply position, in our view. Total OECD inventory data for January was revised up 28.6mmbbl, the February draw was a third of the normal level and preliminary data for March indicate a 22.6mmbbl build, in contrast to the five-year average draw of 10.0mmbbl.
Inventory levels might be bloated in the US, but they are tight elsewhere, as would be expected given the historical undersupply to the market. Evidence that inventory is building provides powerful corroboration that the market is indeed in an over-supply position and additional comfort against the potential threat to Iranian production as a result of sanctions, particularly if that build remains on a strong upward trajectory, as we expect that it will.