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Low Oil Inventories Suggest Imminent Supply Deficit

  • The global crude market could follow natural gas markets as inventories continue to dwindle
  • The International Energy Agency, this month, reported on a gap between its global inventory calculations and the actual inventory situation
  • Outside OPEC+ and U.S. shale, there is no single producer, even a large one like Brazil, that can single-handedly tackle the potential inventory problem

The European gas crunch began when it emerged that the continent's gas inventories were running unseasonably low in the autumn. The whole world saw what this started. 

Now, it's global inventories of crude oil that are running low.

Earlier this month, Morgan Stanley said it had calculated that observable crude oil inventories globally shed some 690 million barrels in 2021 and were now at the lowest in more than five years.

"However, with a constructive demand forecast and relatively cautious expectations for Opec+ supply, we expect inventories to end 2022 lower still," the investment bank said, as quoted in an Argus report from earlier this month.

Then, also this month, the International Energy Agency reported on a gap between its global inventory calculations and the actual inventory situation. According to the report, global crude oil inventories had declined by 200 million barrels more than the agency had estimated they would.

One reason for the mismatch was a substantial underestimation of crude demand. Another reason, according to a Bloomberg report, was the fact that the IEA tracks oil by satellite and excludes crude in pipelines and underground storage. Yet another reason was that the IEA tracks mostly OECD countries and ignores non-members.


What this means, however, is that there may very well be a lot less oil in the world at a time when demand is robust, still growing, and Covid restrictions are being lifted, stimulating yet more demand. It looks suspiciously like a repeat of the European gas situation from the past few months.

"Tank bottoms are in sight across crude and products worldwide already," said Energy Aspects, as quoted by Reuters in a report from this week. "There is a growing acceptance that the oil market has few, if any, shock absorbers left."

What makes the oil market situation possibly worse than the European gas situation is that there is precious little anyone could do to change the balance of inventories to demand.

As numerous reports have shown, OPEC+ is having trouble boosting oil production to the national quotas it assigned its members with the exception of a few producers such as Saudi Arabia and the UAE. The extended cartel is struggling with dwindling spare production capacity that, according to Morgan Stanley estimates, could prompt a decline in global spare capacity from 6.5 million bpd right now to just 2 million bpd by the middle of the year.

Meanwhile, U.S. shale may be posting better results than it has in years thanks to high prices, but a return to the pump-at-will strategy is unlikely, according to Energy Aspects.

"The new era of capital discipline among U.S. producers means that (unrestricted shale production) is no longer the case," the energy consultancy's head of geopolitics Richard Bronze told Reuters.


Outside OPEC+ and U.S. shale, there is no single producer, even a large one like Brazil, that can single-handedly tackle the potential inventory problem. And in the meantime, discoveries of new oil deposits have hit the lowest in at least 20 years, according to Morgan Stanley again.

Guyana has been getting quite a bit of attention lately with the long and still extending string of discoveries Exxon and Hess—and other explorers, too—have made there. But outside Guyana, there has been little to report. Shell recently struck oil offshore Namibia, and that has been about it. Bankers now expect 2022 to be also slow in the discovery department.

At the same time, OPEC+ seems pretty unmoved by global inventory updates, with its joint technical committee saying this week that it still expected an oil supply surplus for this year, only trimming its forecast a little from 1.4 million bpd to 1.3 million bpd. 

OPEC+ decided on Wednesday—in record time--to continue adding 400,000 bpd to its combined monthly output rather than boost additions amid the growing supply worry and higher prices. However, OPEC+ has been unable to meet this group quota for months now, producing significantly less than 400,000 additional bpd.

It could be that OPEC+ is underestimating the global crude oil supply situation. Or it could be that investment bank analysts and other observers are overestimating the effect of the latest decline in global oil inventories and the strength of demand.

However, it's worth noting the IEA admitted crude oil demand had surprised with higher than expected growth during the fourth quarter of last year, and while the agency is now forecasting a slowdown in demand growth during the current quarter, it has also revised its full-2022 demand forecast upwards by 200,000 bpd.

Perhaps this is the time to start hoping that there has been a lot of overestimating concerning demand and underestimation concerning supply. Otherwise, we may see oil in three-digit territory at a very inconvenient time of high inflation across most of the world coupled with higher borrowing costs as central banks tighten monetary policy. This will not be a good place to be.

By Irina Slav for Oilprice.com

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  • Mamdouh Salameh on February 03 2022 said:
    The global oil market is in a unique situation. It is in the most bullish state since 2014 and has also entered a super-cycle phase defined as a sustained period of expansion driven by robust growth in demand that could continue for years and take Brent crude oil price beyond $120 a barrel within the next five years.

    But is also showing clear signs of tightness as manifested by fast-declining global oil inventories which are reported to have shed an estimated 690 million barrels in 2021 and could be expected to end 2022 lower still.

    The oil situation is now comparable to the current gas situation. Europe’s ongoing gas crunch started when it emerged that the continent's gas inventories were running unseasonably low in the autumn. Now, it is global inventories of crude oil that are running low.

    Only OPEC+ and US shale oil have in theory the potential to change the balance of inventories to demand.

    It has been reported that OPEC+ is having trouble boosting oil production with the exception of a few producers and that it is struggling with dwindling spare production capacity. By the time OPEC+ has recovered all the 10 million barrels a day it cut in 2020 at the height of the pandemic, its spare capacity would have shrunk to an estimated 2.0 mbd. In the short term, OPEC+ has enough capacity to keep the market balanced in 2022 and possibly 2023. Long term, it needs an expansion of capacity and this will take up to five years to achieve.

    Meanwhile, the maximum shale oil production could rise is estimated at best at 300,000-400,000 barrels a day (b/d) hardly enough to enhance global inventories.

    Noteworthy is the deliberate efforts by the International Energy Agency (IEA) to mislead the market in a ploy to depress oil prices for the benefit of its members (most Western major consumers of oil). It underestimated the decline in global oil inventories by 200 million barrels as it has been regularly underestimating global oil demand. The way it does it is by deliberately neglecting to include crude in pipelines and underground storage and only tracking oil inventories of its members while ignoring non-members.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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