HardAssetsInvestor

Written by Sumit Roy  |

January 19, 2012

Crude Oil Report: Global Supply To Outstrip Demand By Nearly 1 Million Barrels A Day In 2012, IEA Says

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Inventories may recover to healthier levels thanks to forecast surge in non-OPEC supply, but is the IEA too optimistic?

The Department of Energy reported this morning that in the week ending Jan. 13, U.S. crude oil inventories decreased by 3.4 million barrels, gasoline inventories increased by 3.7 million barrels, distillate inventories increased by 0.4 million barrels, and total petroleum inventories decreased by 2.1 million barrels.

Crude oil prices were up modestly after the latest figures, with Brent last trading at $111.27, while WTI traded at $101.23.

Prices are still considered range-bound as Brent remains in its $100 to $115 band. Although recent geopolitical concerns in Iran and Nigeria boosted prices toward the top end of the range, the benchmark has been unable to break out above the $115 level.

Sentiment in financial markets has been positive, as evidenced by the uptrend in stocks. The S&P 500 hit five-month highs above 1315 today, yet crude has not benefited.

There are two reasons for oil’s recent underperformance. First, the commodity outperformed during the eurozone-inspired market sell-off late last year due to ongoing concerns related to Libyan supplies and low inventories.

Now that inventories are recovering due to an improving supply situation, prices are naturally underperforming. The demand side is also weakening quite significantly as the latest data from the EIA reveal (discussed in the following pages). Last week, U.S. gasoline demand fell below 8 mmbbl/d for the first time since September 2001.

In its latest Oil Market Report, the International Energy Agency said that global oil demand fell in the fourth quarter of last year for the first time since the credit crisis of 2008/2009.

• The agency now forecasts weaker growth of 1.1 mmbbl/d for 2012, down from 1.3 mmbbl/d previously.
• Non-OPEC supply growth may total 1 mmbbl/d, according to the IEA.
• OPEC crude oil output hit 30.89 mmbbl/d in December, up 0.24 mmbbl/d from November, and the highest level in more than three years.

At current rates of production from OPEC, global supply may outstrip global demand by almost 0.9 mmbbl/d, which will help OECD inventories recover from below the five-year average. U.S. inventories, specifically, are already above the five-year average, according to the latest data from the EIA (discussed in the following pages).

The key wild card in all this data is non-OPEC supply. The IEA’s forecast of 1 mmbbl/d growth may prove to be too optimistic, which has been the case in recent years. Last year at this time, the agency forecast growth of 0.6 mmbbl/d for 2011, but the latest data indicate that non-OPEC supply didn’t grow at all in the year.