However, the US oil inventory, which used to drive oil prices, is near an all-time high.
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Message 21214962
Coverup?
Oil inventories may be tighter than you think
By MASOOD FARIVAR
MARKETS DON'T ALWAYS work perfectly. But when oil prices keep rising, even as inventories continue to balloon, you have to wonder if something is getting in the way of economic forces.
Something might be. Consider this: Crude oil and gasoline prices have climbed to record levels in recent days, even with inventories of both standing above their historic averages.
What is going on? Doug MacIntyre, an analyst at the Energy Information Administration, the statistics and analysis arm of the Department of Energy, says he may have an answer. Oil inventories, he says, are actually not as ample as his agency's data indicate.
True, inventories of both crude oil and gasoline stand above their historic averages. But in terms of the number of days of demand they cover, MacIntyre says, they're barely within the historic range. Simply put, inventories haven't kept pace with rising demand in recent years.
Take U.S. commercial inventories of gasoline, for instance: As of the end of March, these inventories stood at 212.3 million barrels, up some 5% from their five-year average of 202.5 million barrels, according to the most recent EIA data.
But don't be fooled. While relatively high in nominal terms, they don't cover as many days of demand as the numbers suggest.
In fact, on a "forward-cover" basis, current inventories cover 23.1 days of demand as opposed to 24.3 days of demand for the historic average, according to MacIntyre.
That's because gasoline demand has grown by 1.8% a year over the past five years, while stockpiles have increased by only 1% a year during the same period.
The trend also applies to inventories of crude oil. As of the end of March, U.S. crude stockpiles stood at 317.1 million barrels, 5% higher than their five-year average of 302.3 million barrels. But both the current and historic-average levels of these inventories cover about 20 days of input into refineries.
Think of it as inflation: Just as $200 doesn't buy as many goods today as it did 10 years ago, 200 barrels of oil doesn't cover the same portion of total demand today as it did 10 years ago.
"What explains it is the fact that demand has grown stronger and inventories not as much," MacIntyre says. "What we're saying is that instead of looking at absolute levels, you really need to look at how many days of cover those inventories would account for."
In the early 1990s, when oil demand remained relatively flat, forward cover wasn't nearly as significant. But with oil demand on the rise in recent years, it's become more relevant, MacIntyre says.
Indeed, with oil at the forefront of financial markets, the EIA's weekly inventory figures have assumed the importance of a key economic indicator. Foreign-currency dealers, bond traders and fund managers watch them just as closely as payrolls.
The notion that weekly EIA figures may give a distorted picture of the inventory situation appears to be catching on in the market. Increasingly in recent weeks, traders have shrugged off growth in crude and gasoline inventories as they have bid up futures.
"The days of forward cover is clearly a more accurate way to look at it," says Andy Weissman, president of the investment firm Energy Ventures Group. "The absolute number is meaningless unless you put it in context, and the days of forward cover does that."
Weissman says that while shrinking forward demand cover may partly explain the rise in oil prices, there is another reason for the rally: fear that refiners won't be able to meet demand.
That may be. Others argue, however, that market forces will eventually prevail, as rising inventories begin to exert downward pressure on prices.
STEVE HANKE, a professor of applied economics at the Johns Hopkins University, says he isn't convinced inventories are as tight as forward cover implies.
He notes that crude-oil futures on the New York Mercantile Exchange have moved into "contango" -- a situation where the spot price is lower than the futures price -- after years of the opposite price trend, known as "backwardation."
That means the market is so well-supplied that refiners are actually getting paid to build inventory. As inventories continue to build, prices will have to fall in response.
"When you switch from a situation where it is costing you to accumulate inventory to a situation where you're getting paid to accumulate inventory, you know you've entered the final stage of a bull market," HANKE says.
AFTER HITTING A RECORD $58.28 Monday, nearby crude-oil futures plunged nearly 9% last week, following a sharp slide in gasoline prices, as refinery activity surged. |
