Oil Stockpiles Most Since '98 Price Crash

NEW YORK, Nov 11, 2006 (Dow Jones Newswires)

In OPEC's worst nightmares, the oil price collapse of 1997-1998 replays over and over.

The group's strategies since then are wrapped in a vow never to allow a repeat of the market conditions that precipitated a halving of crude prices to below $11 a barrel.

But latest data for global oil stockpiles in the major industrialized countries echo back to those dismal days for the oil exporters' group. Inventories held by the members of the Organization of Economic Cooperation and Development at the end of the third quarter were 2.759 billion barrels, the highest since 1998, data from the International Energy Agency show.

The stockbuild in the quarter averaged 1.15 million barrels a day, or 106 million barrels, the biggest gain for the period since 1991. The 4% rise in the quarter was nearly six times the five-year average gain, IEA data show.

Small wonder then that while the market was focused on the precipitous fall in prices - some 25% from mid-July - leading to OPEC's decision to cut output by 1.2 million barrels a day from Nov. 1, OPEC was talking about the need to shave the inventory overhang and balance the market.

The trouble is that just like OPEC's undefined target crude price level, the Organization of Petroleum Exporting Countries hasn't been clear on what level of stocks it would like to see.

Data from the Paris-based IEA, the West's energy watchdog, show the relative level of OECD oil inventories was sufficient to cover 55 days of demand at the end of September, unchanged from a month earlier, and two days higher than a year earlier. That 55-days level also is two days higher than the five-year average, and the most since 2001. The last time stocks were this high, OECD demand was lower, so the relative level of stocks was higher, covering nearly 58 days of forward demand.

Saudis Cautious On Stock Levels

While no one is suggesting that prices may again tumble to anywhere near the low of the late 1990s, OPEC is still keeping a close eye on stocks.

Ali Naimi, oil minister of Saudi Arabia, the world's largest oil exporter, made clear Nov. 7 that he plans to press OPEC to make further cuts in output at its Dec. 14 meeting in Abuja, Nigeria. The de facto OPEC leader's pronouncement comes despite oil prices holding near $60 a barrel for U.S. benchmark West Texas Intermediate crude.

Naimi said at a meeting of Gulf Cooperation Council oil ministers in Abu Dhabi, that there is a "very high probability" OPEC will cut output again when it meets next month. "Our aim is to balance the market," he said.

OPEC members decided at an Oct. 20 meeting to take 1.2 million barrels a day of oil off the global market to bolster prices, starting Nov. 1. During that meeting, Naimi said OPEC may need to slash oil output by a further 500,000 barrels a day in December.

OPEC shouldn't be talking about further cuts, as peak winter oil demand in the Northern Hemisphere lies ahead, said Claude Mandil, executive director of the IEA. "We are entering a winter season and it's still not clear if we'll need more supply," Mandil said in Singapore on Nov. 9. While stockpiles are high, "forward demand cover for oil was not a lot" at 55 days, he maintained.

Oil prices near $60 a barrel are "too high" for OPEC to be considering a further cut, Mandil said.

While there isn't any doubt stocks were high at the end of the third quarter, analysts said stockpiles have been tightening rapidly since then.

Preliminary October data suggests that stocks fell by an unusually high 34 million barrels in the month, to around 2.725 billion barrels, putting the relative level of stocks at 53.8 days of demand, said Toril Ekeland Bosoni, who tracks OECD inventories for the IEA.

In the past five years, OECD stocks in October have risen by an average of more than 9 million barrels. Stocks at the current estimated levels would still be the most for October since 1998 and the relative level of stocks would be one day higher than the five-year average.

"OECD stocks are essentially moving back to mid-range on a days-of-demand basis," said Lawrence Eagles, editor of IEA's monthly oil report. The move is occuring even ahead of the impact of continuing global refinery maintenance shutdowns and the pledged OPEC crude cut-back.

Strong 4Q Global Growth

The IEA's latest monthly oil report, issued Friday, was bullish, Kevin Norrish, analyst at Barclays Capital in London said in a research note. The report suggests "surging Q4 demand and tightening markets, even if the winter were not to be particularly cold," he said.

Cutting its estimates from a month-earlier, the IEA lowered its assessment of global demand in the third quarter by 300,000 barrels a day and increased its fourth-quarter estimate by 100,000 barrels a day.

IEA now sees global oil demand growing by 2.4 million barrels a day in the fourth quarter from the third quarter, to 86.3 million barrels a day. That's triple the global growth rate in the same period last year, when U.S. demand was hit by the impact of hurricanes, and worldwide oil use gained only 800,000 barrels a day between in the period.

The U.S. Energy Information Administration, in its Short-Term Energy Outlook issued Nov. 7, projected OECD inventories will drop by 90 million barrels in the fourth quarter from the third quarter, at 2.66 billion barrels. That would still leave the absolute level of stocks at year-end on par with 1998 levels.

OPEC's level of adherence to its already agreed output cuts won't become clear until around the time ministers convene in Nigeria Dec. 14, coincidentally a day after the IEA publishes its next monthly oil market report.

OPEC's decision whether to cut output again may rest just as much on the level of inventories as on the level of crude prices at the time.

Copyright (c) 2006 Dow Jones & Company, Inc.


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