Even as the picture gets clearer on the status of the physical fundamentals underlying oil markets today, the geopolitical outlook just gets more scrambled.
The only reason futures prices retreated a bit in mid-October was a larger-than-expected buildup in commercial crude stocks. The American Petroleum Institute reported that US commercial crude stocks rose by 8.9 million bbl the week ended Oct. 11.
But, as Merrill Lynch analysts noted, total oil stocks rose a mere 500,000 bbl in the same week, as the big rise in crude stocks was offset to a substantial degree by "unseasonably large draws" on gasoline, jet fuel, and distillate.
"While some catching up in the numbers, particularly for crude, was expected because of the weather-related delays in import operations, we must note that total oil stocks over the past 3 weeks (i.e., from prehurricane levels) dropped 23.8 million bbl as compared with a normal draw of just 1.7 million bbl," Merrill Lynch analysts reported in an Oct. 17 research note. Even US gasoline stocks have reached levels below normal for the first time in 13 months, which means that all components of US oil stocks, both crude and all core products, are below normal now. And the crude stockbuild was only temporary, having coincided with US refinery utilization dropping in response to the Gulf of Mexico weather woes.
The tightness doesn't end with the US. Oil stocks in the Organization for Economic Cooperation and Development countries ended last month 45 million bbl below the historical norm, the Merrill Lynch analysts estimated. That compares with a relative deficit of 17 million bbl at the end of August and a 93 million bbl surplus at the end of last winter.
Rising demand
This change also reflects an apparent uptick in demand, with world oil demand ending the third quarter with its first year-to-year growth since first quarter 2001, according to the analysts.
So all the signs normally would point to refiners rebuilding crude stocks and stepping up runs to make more heating oil for what already is shaping up as a colder winter than the last.
But working against those trends are high crude oil prices. Refiners remain reluctant to build up stocks of crude or make more product until crude prices soften or a demand spike egged on by cold weather reduces already-short inventories.
In a classic bit of understatement, the International Energy Agency's take on the situation was, "That refiners are not eager to purchase crude in today's environment is not a sign of a stable, balanced market."
So from a physical standpoint, oil markets are poised on a razor's edge even without the so-called "war premium," about which the market cannot get a clear fix.
Geopolitics scrambled
Meanwhile, the picture just gets cloudier on oil's geopolitical front. The terrorist attacks in Kuwait and off Yemen already were pointing disturbingly to new efforts by (in all likelihood) Al Qaeda to give President George W. Bush and the United Nations Security Council more than an Iraq attack to worry about.
A chief complaint against the Bush administration's plans for disarming Iraq has been the difficulty of fighting two wars simultaneously, notably the competition for attention from the US war on terrorism. Now terrorist factions have upped the ante in a horrific way with the bombings in Bali. This extends the war on terrorism to a front where the local government has been in denial about the problem all along, which begs for deeper US involvement against terrorism in Southeast Asia just as more attacks are occurring in the Middle East.
As if that weren't complicated enough, we now have North Korea's admission of developing a nuclear weapons program muddying the mix still further. It certainly bolsters the case of those who argue against a preemptive strike on Iraq.
However that challenge is dealt with, it will mean still more competition for the Bush administration's attention while it struggles to stay ahead of the cat-and-mouse game Saddam Hussein is only to happy to continue and even escalate. So the impetus for military action now fades a bit more.
The upshot of all this scrambled geopolitics is a likely easing of the war premium—if it truly still exists at all—just when refiners need lower crude prices and consumers need comfortably priced heating oil.
(Online Oct. 18, 2002; author's e-mail: [email protected])
