Point/Counterpoint: David Andrew Taylor Misreads Current Oil Inventories

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.

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.

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.

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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Comments

[Ramrod:]

According to your source, the US consumed roughly 3.5 million barrels per day of refined product, not crude, in June 2006 (see tonto.eia.doe.gov/dnav...). Based on that it looks like the shortage (for 10 days consumption) is more like 35 MILLION barrels of refined product, not crude (which will be less).

So I am baffled by how your analysis extrapolates that to an 80 BILLION barrel refined products shortage.

Considering there is close to a billion barrels of crude on the water, last I heard, 35 million barrels of refined products doesn't really support prices at these levels. But, then again, my counting skills are often questioned by my dogs...

2006 Jul 10 09:02 AM

[William Trent:]

The link you provide is for weekly product provided, measured in thousands of barrels per day. So taking the recent run rate of just under 21 billion barrels per day, and multiplying that by the four or five days of inventory needed to get back to the average of 55 days' inventorygets me to a minimum level of 80 billion barrels.

2006 Jul 10 11:41 AM

[Ramrod:]

Hmmmm, let's see...

21 BILLION BARRELS PER DAY =
75,000 BARRELS PER DAY PER PERSON IN THE US.

Yep, sounds about right to me! Except for the billions part...

Seriously, it looks like you're off by an order of magnitude.

2006 Jul 10 03:58 PM

[William Trent:]

My bad. A billion here, a billion there, pretty soon I'm adding zeros to everything. Thank you for pointing that out. That said, we are still 10 percent below the average days' supply - which was the main thrust of the article.

2006 Jul 10 05:00 PM

[CWall:]

I think that your post has merit, not withstanding the math error, because it points to the crucial factor affecting oil prices: inventory cover. There are a couple of points that I think add to the discussion and alter the conclusion. The first is that demand is being destroyed so quickly that numbers being used in forward demand are almost certainly too high. That serves to understate the inventory cover. Second, the actual inventory has recently become much larger than the recorded inventory at Cushing. Tankers, and now rail cars are filled with crude and sit idle as storage facilities for speculators trying to arb the profits from record wide contango in crude. There is no official record of this type of storage (that I am aware of). Leaving this out of the inventory calculation also serves to understate actual inventory cover. Finally, there is reporting lag. The situation is changing so rapidly that 3 week old information can be significantly off the mark. One has to extend the lines and do some good old fashioned guesstimating. Consequently, I think these three additional factors when considered add to the actual number of days supply of crude available to cover forward demand. And I suspect that when you update your chart with new data next month you will find the number of days continues to rise. It all suggests to me that oil has another leg down in price over the short term. The trend will only abate when OPEC makes significant production cutbacks.

Jan 30 12:06 PM