Opec’s plans to boost output next month fall well short of what is required.
More oil is urgently needed to close the gap between demand and supply,
and halt the stockdraw.
Oil markets look dangerously tight as the peak winter demand season approaches. Stocks are low and falling but Opec is still unwilling to provide enough crude to fill the gap between demand and supply — despite surging oil prices that continue to set records above $85/bl. Although more crude is promised next month, the 500,000 b/d quota increase falls well short of what is needed.
Estimates of the gap between supply and demand vary widely, but all agree that Opec is not producing enough, leaving the industry to draw down stocks to satisfy consumers. Global inventories have fallen by an average of 600,000 b/d since Opec cut its output a year ago, according to Argus estimates, turning last summer’s looming stock overhang into this summer’s worrying stock shortfall. Critically, global oil stocks actually fell last quarter instead of rising, which is the normal seasonal pattern.
Stocks are essential for the smooth running of the oil supply system. The industry holds large inventories of crude and products, but most of these stocks are not available for consumption as they are required either to keep the supply chain operating efficiently or by governments for strategic reasons. Over the past decade, OECD industry stocks varied in a narrow range from 50 to 55 days of forward demand cover, indicating that companies have only a few days worth of flexibility in the level of commercial stocks that they can hold.
Last quarter’s 500,000 b/d global stockdraw has already eroded most of this commercial flexibility, leaving OECD companies with around 52 days of forward cover at the start of the fourth quarter, according to Argus estimates. This quarter will see a further stockdraw of at least the same magnitude — even if Opec boosts crude supply as planned next month — leaving OECD companies with barely 51 days forward cover by the end of this year, the lowest level since 2004 and close to the historical minimum of 50 days. And the draw is set to continue next year if Opec does not respond.
Stocks simply cannot go on falling at this rate. Despite Opec’s claims to the contrary, industry stocks look increasingly inadequate and oil prices are showing the strain. But there is no sign of relief. Argus estimates that the 10 Opec members that participate in production agreements need to boost output by nearly 1mn b/d this quarter — double what they agreed last month — to halt the stockdraw. Even Opec must recognise that there is now a shortfall, as its latest Monthly Oil Market Report forecasts demand for its crude this quarter at 31.4mn b/d — 500,000 b/d more than it has agreed to produce.
If Opec does not supply more oil soon, prices will go on rising. High prices are already slowing demand growth, but the global economy remains remarkably robust. The latest IMF World Economic Outlook expects the US economy to slow significantly next year, but growth in the rest of the world will only moderate slightly. Argus expects global oil demand to grow by 1.4mn b/d (1.6pc) next year — much less than the 2.1mn b/d (2.4pc) predicted by the IEA and about the same as Opec. But if non-Opec supply growth continues to lag behind global oil demand, Opec will need to boost output by about 1mn b/d throughout 2008 to avoid further stockdraws.
