Should We Worry as Oil Stocks Hit 3 Billion Barrels?

 

Commentators have seized on the 3 billion figure as a shorthand way to convey how oversupplied the oil market has become.

 

Large round numbers exert a powerful pull on the imagination but shorn of context they are meaningless and apt to confuse rather than illuminate.

 

The statistic is technically accurate but the way in which it is being employed by analysts and journalists is hugely misleading.

 

It would be more helpful to report the change, which is 240 million barrels, or 9 percent, over the last year.

 

Global Oil Inventories

The 3 billion barrels figure being widely quoted is actually for a relatively small subset of the total crude and products being stored.

 

Global stocks of crude oil and refined products are probably at least double this figure, at more than 6 billion barrels.

 

Oil producers, traders, pipeline operators and refiners held crude and products stocks in the OECD countries amounting to 2.989 billion barrels in September, according to the IEA ("Oil Market Report" Nov 2015).

 

But the figure excludes government-controlled stocks in the OECD, private and government stocks in emerging markets, oil in transit by tanker, as well as all stocks held by wholesalers and end-users.

 

OECD governments controlled a further 1.581 billion barrels of oil and refined products stocks as emergency reserves, taking total stocks on land in OECD countries to almost 4.6 billion barrels, according to the IEA.

 

Developing countries tend to hold smaller stocks in private and government-controlled storage but they account for half of global oil demand and could easily be holding another 1 billion barrels of stocks.

 

China, for example, is thought to hold more than 200 million barrels in its government-controlled Strategic Petroleum Reserve ("Oil Market Report" Sep 2015).

 

If refiners in emerging markets hold the same operational stocks on site as their counterparts in the advanced economies, there are likely to be at least another 500 million barrels in private storage in developing countries.

 

All the figures given so far exclude stocks in transit by tanker from oil exporting countries to the major refining centres.

 

There are roughly 650 very large crude carriers (VLCCs) plying the seas with a total carrying capacity of around 1.3 billion barrels of crude oil.

 

If roughly half are filled with crude, while the other half are in ballast on the return journey, that would imply another 650 million barrels of crude in transit.

 

Hundreds of millions more barrels of crude are in transit in smaller Suezmax and Aframax vessels plus millions of barrels of refined fuels in transit by tanker.

 

It is relatively easy to produce an estimate that puts global crude and products stocks somewhere in the region of 6-8 billion barrels.

 

Operational Requirements

The impression is sometimes given that stocks are sitting idle waiting for an upturn in demand before being consumed, but holding large volumes of stock at all points in the supply chain is an operational necessity.

 

The entire supply chain was illustrated in a study by the U.S. National Petroleum Council "U.S. Petroleum Product Supply: Inventory Dynamics" in 1998.

 

Looking at just the commercial and crude stocks reported by the IEA, oil refineries typically want to hold crude oil on site in their tank farms equivalent to around 6-10 days worth of processing.

 

Tank farm storage gives the oil time to settle, permits optimal blending, and enables the distillation units to be fed continuously, while protecting against any delays in fresh crude arriving.

 

Global refineries process more than 80 million barrels of crude every day which implies they need around 500-800 million barrels in storage for immediate operational needs.

 

In addition, well over a billion barrels of oil and refined products are moving from oil fields to refineries and then to bulk distribution terminals every day via tankers, pipelines, barges and railroad tank cars.

 

In the United States alone, there were almost 100 million barrels of crude oil in transit by pipeline, railroad tank car and barge in March 2015, all of which are counted in commercial crude stocks by the U.S. Energy Information Administration (EIA).

 

Then there are hundreds of millions of barrels stored in tanks at oil fields and ports around the world awaiting for export by tanker.

 

In the United States, there were 35 million barrels of crude still in storage at the oilfields in March, which are again included in the EIA reported commercial stocks figures ("Working and net available shell storage capacity" May 2015).

 

Refineries also hold hundreds of millions of barrels of partially refined oil as part of their operations, and there are hundreds of millions of barrels of refined fuels ready for shipping to customers.

 

Every figure so far has been for "primary stocks", but additional stocks of refined fuel are held by wholesalers and distributors ("secondary stocks") as well as end users ("tertiary stocks").

 

The enormous inventory held at every stage in the supply chain from oilfield, export terminal, pipeline and tanker to tank farm, refinery and bulk fuel terminal explains why refined fuels are nearly always available.

 

Prices are volatile but there are almost never actual physical shortages of crude or fuels like gasoline and diesel because inventories create operational flexibility and resilience in the supply chain.

 

Oil storage is becoming very big business. According to the IEA: "An impressive 230 million barrels of new land-based storage capacity could be commissioned before end-2016 in locations as diverse as North America, the Middle East, Africa and South East Asia, with Chinese SPR capacity expected to account for more than half."

 

The volume of crude and products in commercial storage on land in the OECD is important because it is one of the most flexible parts of the storage system.

 

It is also one of the most visible parts of the supply chain where changes in stock levels are most likely to be reported.

 

OECD commercial storage is where any imbalance between supply and demand in the global oil market is most likely to show up.

 

But the problem with quoting the 3 billion figure is that that without proper context it gives the impression the world is drowning in surplus oil, which is grossly misleading.

 

The stock of crude and refined products in commercial storage in September 2015 was 241 million barrels higher than in 2014, 274 million higher than 2013 and 239 million higher than 2012.

 

OECD crude and products stocks are 340 million barrels, 13 percent, higher than in July 2008, when many commentators were worried about oil shortages and crude prices were peaking at more than $140 per barrel.

 

Current OECD stocks cover 98 days of consumption, up from 93 days at the same point in 2014, and 86 days in June 2008.

 

Oil prices are set at the margin, so the 240 million barrel increase in commercial stocks over the last 12 months has significantly depressed prices.

 

But it is much more useful to focus on the rate of change rather than the absolute level of stocks.

 

The 3 billion figure should be banished from serious analysis, or at least put into a proper context.