International Energy Agency (IEA) member countries are coordinating the release of emergency oil inventories, helping to ease supply concerns and reduce market tensions by bringing more physical supply to the market. This has also contributed to an increase in commercial inventories and a drop in prices.
As part of the IEA’s collective release of emergency reserves and the additional US SPR sale, 33.8 million bbl of government stocks were made available to the market in June. The US sold 29.4 million bbl, or 980,000 b/d, of SPR crude oil while European countries released 1.6 million bbl of middle distillates and 400,000 bbl of gasoline. Another 2 million bbl of crude and 600,000 bbl of middle distillates were drawn from Korean emergency reserves.
According to latest IEA data, total OECD industrial inventories rose by 6.2 million bbl to 2.68 billion bbl in June but remained below the 5-year average by 292 million bbl. Commercial crude oil inventories edged up by 400,000 bbl, compared with a normal decline of 21.7 million bbl. Product inventories rose by 6.9 million bbl in line with seasonal trends. In terms of forward demand, OECD industrial inventories totaled 58.5 days, an increase of 0.2 days from the previous month, but a decrease of 4.4 days from the same period last year. Preliminary data for July showed OECD industrial oil inventories rose by 15.5 million bbl. The biggest increase was in US other product inventories.
Inventory, oil prices
Oil prices have been trending lower as OECD industrial inventories continue to rise. The gloomy economic outlook and its impact on oil demand growth are also among the most important market drivers.
“The current energy crisis sparked by Russia’s invasion of Ukraine at end February underscores this market dynamic. OECD industry stocks hit a low of 2.62 billion bbl in March before rising progressively to 2.68 billion bbl in June, thanks, in part, to the massive release of government reserve stocks. Prices have since fallen to $105/bbl on average in July as inventories continue rising, crucially in some OECD countries where industry stocks had dropped to very low levels,” IEA said.
Oil inventories and changes in oil prices are intrinsically linked, especially during global crises, during which low industry inventory levels push up prices while increased industry inventories drive down prices. The overall correlation between OECD industrial oil inventories and Brent futures has been a very stable negative 0.89 ratio over the past decade, according to an IEA estimate.
“While the price levels reflect stock levels, the stock levels react to the structure of the futures price curve: contango (linked to low prompt prices) supports stock builds while backwardation (when prompt prices are high) pushes stock draws. The negative correlation is not as strong on a regional level as it is on a global basis. The distinct drivers for the reference crude price for each region...take into account very different time horizons and regional market factors. The correlation of prompt futures prices with regional stock is better for WTI in the Americas than for Brent in Europe and Dubai in Asia Oceania,” IEA said.
When to end?
IEA member countries are scheduled to continue to release emergency reserves through October 2022, by which point a decision will be made regarding future releases. A decision to end collective action, however, is unlikely until market tightness has eased significantly, and the outlook is brighter. Once collection action ends, IEA countries will decide the timeframe for rebuilding emergency reserves.
However, with Russian output expected to drop sharply in second-half 2022 and into 2023, the prospect of more tightening in the oil market could reignite a new round of government reserve releases.
