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Oil Notes: The Year Of The Missing Barrels -- Standard Chartered (Paul Horsnell)

Here's a report filled to the rafters with facts and charts. Paul Horsnell, who has been around for some time, is the head of the StanChart commodity crew.

My opinion is that it is a very balanced view in oil matters. The only point to disagree with is his pretty negative view on the US economy (1% in 2016), which adds demands concern to the oversupply issues. His downbeat view runs counter to our estmations of Q1 2016 qoq GDP at circa 3.2%, and 3.4% for the entire 2016.

Here are some outstanding charts from the report:

Data fog and missing barrels

The latest IEA Oil Market Report (9 February 2015), provided a highly bearish view of market fundamentals, but also revealed a large number of so-called 'missing barrels'. Missing barrels are imbalances between estimates of supply and demand that do not appear in observed changes in inventories. Of the 2.2 million barrels per day (mb/d) market surplus the IEA estimates for Q4-2015, 2.1 mb/d are missing barrels; i.e., the large inventory builds that were expected have not happened.

This uncertainty has negative and positive aspects. The negative aspect is that the most widely followed set of global balance estimates implies a large supply surplus and will likely do so for several months. The tone of IEA editorials (which often feed through into consensus views and media coverage) has become extremely bearish, and will likely continue to be as long as the missing barrels are treated as if they are real barrels of excess supply. The positive aspect is that 2.1mb/d of missing barrels is more likely to be the result of underestimation of demand and overestimation of supply than miscounted inventories. This leads us to believe that there is an unusually thick data fog surrounding current market balances, and that the supply surplus is considerably less than the IEA contends. This scenario should prove positive for market sentiment later this year when a more accurate picture emerges.

Missing barrels, the invisible glut

In our view missing barrels are a key issue for oil market fundamentals in assessing how weak it is now, and how long it will take it to regain balance. The oil market tends to accept the hypothesis that current excess supply is very large, without much examination. The IEA estimates that the Q4-2015 surplus was 2.2mb/d, and it is projecting a continuing surplus through this year. For most traders the IEA view serves as sufficient confirmation of enormous excess supply. However, what is less often discussed is that the IEA cannot fully account for the excess barrels; most of the estimated surplus has disappeared from the data.

If the IEA numbers were correct, these excess barrels should translate into large increases in actual inventories. Instead, only a small proportion has appeared in observed inventories. The rest are known as 'missing barrels', excess supply inferred on the basis of aggregate supply and demand, but which cannot be found in observed inventory changes onshore or in floating storage or oil in transit. As shown in Figure 1, missing barrels make up most of the estimated supply surplus. Since Q4-2014, when OPEC decided not to attempt to support prices by output cuts, through to the end of 2015, the IEA supply and demand estimates imply that a cumulative excess supply of around 840 million barrels (NASDAQ:MB) should have gone into inventory. However, 600mb of this excess is missing; i.e., less than one in three barrels of the implied surplus can be traced, and for Q4-2015 less than one in ten barrels of the surplus can be accounted for.

There are several possible explanations for the missing barrels. Some may be accounted for by changes in non-OECD inventories, including strategic reserves. Some may appear later due to data lags. However, in our view the most likely explanation for the majority of the missing barrels is simply that they do not exist. The estimate of excess supply is the difference between two very large numbers - supply and demand - both of which are measured with error. Overestimation of supply and underestimation of demand results in missing barrels, and appears to us to be a more plausible explanation than that the barrels are hiding somewhere where they cannot be seen. Even allowing for a healthy rate of build in China's strategic reserves, we do not think that non-OECD inventories can account at most for more than a quarter of the missing barrels.

You may read or download this report here.