Hide And Seek: A Global Inventory Game Is Playing Out In The Oil Markets

Nov. 19, 2018 9:30 AM ETUSO, OIL-OLD, UCO, SCO, BNO, DBO, DTO, USL, DNO, OLO-OLD, SZOXF, OLEM, OILK, OILX457 Comments

Summary

  • OPEC+ is playing a big inventory game this year.
  • Export swapping pushed increased exports to US, while non-OECD inventories decreased (mainly China).
  • This has resulted in market participants to believe that global oil demand growth is slowing down.
  • In addition, this is leading OPEC+ to believe that it needs to cut production of up to 1 to 1.4 mb/d. When 3 of the OPEC members may see production decline of that size in 2019.
  • Looking for a community to discuss ideas with? HFI Research features a chat room of like-minded investors sharing investing ideas and strategies. Start your free trial today »

Welcome to the hide and seek edition of Oil Markets Daily!

There's a giant global oil inventory game being played right now leading oil market participants to believe that there's a "surplus" in the oil market. Here are two charts presented by Bernstein:

Global Inventories Including Non-OECD (ex-OPEC, China SPR)

Global OECD

Now from the two inventory charts, you can see that since March of this year, OECD stockpile has increased while global inventories have largely stayed flat. Now if you want to break it down even further, most of the storage increases came from the US.

We wrote in two reports last week noting that Saudi has already started to decrease crude exports to the US, but since the end of March 2018, high US Saudi crude imports (above ~700k b/d) contributed to ~48 mbbls in US crude storage build.

Sources: EIA, HFI Research

This is the startling difference between what US crude storage would look like if Saudi had kept exports at ~700k b/d to the US:

And with US total liquid stockpile builds concentrated mostly in gasoline and crude, we can see that the delta change in y-o-y total liquid stockpile has been bearish since the end of June 2018:

What does that mean going forward?

Right now, OPEC+ is contemplating a production cut of 1 to 1.4 mb/d based on the idea that its own report, IEA, and EIA are all saying the global oil markets are going to be oversupplied in 2019. With this as the baseline for considering the production cut, the market continues to forget several variables in play:

  1. OPEC cut does not consider any additional production declines from Venezuela, Iran, and Angola. The total, we estimate, to be ~1.45 mb/d y-o-y in 2019.
  2. The assumption already uses a weak global oil demand

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