IEA sees oil stocks trending lower

Sept. 20, 2002
Amid sluggish demand growth, poor refining margins, decreased compliance with output quotas by members of OPEC, and the risk of a double-dip recession, the price of oil has hovered around $30/bbl.

Marilyn Radler
Economics Editor

HOUSTON, Sept. 20 -- Amid sluggish product demand growth, poor refining margins, decreased compliance with output quotas by members of the Organization of Petroleum Exporting Countries, and the risk of a double-dip recession, the price of oil recently has hovered around $30/bbl. While it's widely thought that market psychology surrounding a war premium for a possible Western-led conflict in Iraq has driven this price hike, the International Energy Agency asserted that those who argue that market fundamentals are weak underestimate the disconnect between crude and product stocks.

In its latest report, Paris-based IEA said that, although product inventories are comfortably in the middle of their 5-year range in terms of days of forward cover, crude stocks are low and are trending lower.

The agency's preliminary estimates indicate that Iraqi oil-for-aid exports fell 270,000 b/d in August, while OPEC-10 production increased a mere 24,000 b/d. In addition, North Sea and former Soviet Union output declines coincided with a seasonal increase in transportation demand, increased military purchases, and injections into strategic stocks.

Crude stocks look uncomfortably low going into the heating season, said IEA. "The market bears may be correct about soft fundamentals and a weak global economy over some longer time frame, but their conclusions do not apply in the short term as the Northern Hemisphere heads into winter," officials reported.

During July, Organization for Economic Cooperation and Development (OECD) industry oil stocks slipped to 55 days of forward demand cover, even with that of a year earlier, as crude stocks declined 790,000 b/d and product stocks grew 80,000 b/d. Total crude stocks closed the month at 895 million bbl.

With westbound oil from the Middle East in decline since the beginning of the year, overall arrivals of crude into western ports were more than 1 million b/d below end-July 2001 volumes, said IEA.

North American crude stocks finished July 14.5 million bbl lower. Crude runs in the US were unchanged from a year earlier, but import volumes were off, forcing a draw on refiners' inventories. At 2 million bbl, additions to the US Strategic Petroleum Reserve were down more than 50% from the previous month.

In Europe, crude inventories held steady. Pacific crude inventories declined 320,000 b/d; this was led by Japan, where refiners increased runs following regular maintenance in May and June.

Peak demand during the US summer driving season eroded gasoline stocks in the Atlantic basin during July. US finished gasoline stocks fell 4 million bbl for the month.

Oil demand
Due partly to strong US gasoline use, IEA raised its third quarter assessment of global oil demand 220,000 b/d, the same pace at which the agency pegged 2002 demand growth.

IEA expects August demand will show the strongest growth in a year. OECD demand is forecast to continue to expand from then on, in line with the unhurried progress of the global economic recovery.

First half 2002 non-OECD demand contracted a bit more than previously reported due to the impact of the Argentine financial crisis and its effects on Latin American demand and other economies in the region. Argentine demand has been sinking at or near double-digit rates for more than a year, down 11.7% for second quarter 2002.