Point/Counterpoint: David Andrew Taylor Misreads Current Oil Inventories

 |  Includes: IYE, PXE, USO, VDE, XLE
by: William Trent, CFA
David Andrew Taylor posted on oil inventories this past Friday. He had the following to say:

If you take a look at the long-term charts for both oil and gasoline, you may notice that we are above average on both of these supplies. For the data that I have going back to 1990 for gasoline and 1980 for oil, the average for gasoline is 209,300 while we are sitting at 213,100. Slightly above average. However, for oil, it’s a little more above the average of 325,526 while we are at 341,300. We’ve got more than plenty of oil. With the current supply levels higher than we’ve seen in a number of years, one would also assume that the price would be lower than normal. Geopolitical concerns are clearly to blame for charts that look like these.

He believes oil prices should be at $30 - $40 per barrel based on today’s inventory levels. We commented on his site that the inventory level was not as important as the number of days worth of demand that the inventory would cover, then decided to provide the answer here.

First we look at the total stocks since 1990, including the Strategic Petroleum Reserve [SPR]. The data was taken from the Department of Energy’s Energy Information Administration. The chart is scaled to dramatize the weekly fluctuations, which have actually been in a fairly tight range of 1.50 - 1.75 billion barrels for the last 16 years. Still, the current level of stocks is the highest it has been during that time.

Oil inventories 1

Since the SPR is not intended to be readily available, we also look at the data excluding SPR, also provided by the EIA. Here, the inventory levels appear to be above the long-term average but are not at especially high levels.

Oil inventories 2

Finally, we convert the data into the number of days the inventory will cover existing demand. Here it becomes clear that relative to demand the inventory levels have been steadily falling. No need to blame geopolitical events - we have less than normal inventory levels relative to the amount we consume.

Oil Inventories 3

In order to bring inventory days back up to the average for the last 16 years, we would have to increase the non-SPR stocks by more than 80 billion barrels. This is across all products, crude and refined. However, we believe analysis of each type of refined product would lead to similar results.

With inventory levels 80 billion barrels below where they have averaged we see no reason to be surprised that oil prices are at high levels.

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