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Missing barrels


A core part of our thesis anticipating the weakness in oil prices that has now developed is that the market moved from an under to an over-supplied position at the start of the year. At current levels of production, that over-supply looks set to continue, albeit at a slower pace than for 1H12.

If that is the position in the market, then according to our calculations global inventory has built on average 1.7mmb/d or just over 300mmbbl for 1H12. However, at present it is just about possible to account for around 80% of that, leaving some 60mmbl unaccounted for, equivalent to over 300kb/d.

OECD inventory, which is currently available to May, shows a total build in crude of around 89mmbbl while total hydrocarbon inventory has risen 71mmbbl. China does not publish oil demand or inventory data, but the unusually wide discrepancy between the two methods of calculating Chinese demand would tend to indicate that there has been a build in crude inventory of around 100mmbbl, most of which probably went to strategic inventory. The Joint Organisations Data Initiative (JODI), which is an oil producer-consumer body intended to reduce uncertainty over key oil data, provides limited insight in some areas, but suffers from significant data gaps (e.g. China, India and Iran). For the OPEC members it covers, it shows OPEC inventory increased about 30mmbbl. Finally, Bloomberg shows an increase in offshore storage of a little over 20mmbbl.

Compared with supply and demand estimates, inventory data suffers from major gaps, substantial lags and is subject to large data revisions. By far the largest gaps are in the non-OECD areas and as these now account for half of global oil demand that is creating weaker corroboration of the supply/demand data. We continue to believe that it is likely that the missing barrels have been produced but are unaccounted for. As yet, however, it remains entirely possible that markets have been tighter than supply/demand data suggest which would provide a firmer backdrop to oil prices.

Colin Smith
VTB Capital analyst

oil, OECD, China, Iran, India, OPEC

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