Surge in US Crude Stocks Blunts OPEC Cuts
NEW YORK (Dow Jones Newswires), Feb. 6, 2009
OPEC cut crude oil output by nearly 1.3 million barrels a day in January in an attempt to tame the growing supply glut that is anchoring prices near $40 a barrel.
But as the Organization of Petroleum Exporting Countries tightened the taps, crude oil inventories in the U.S. were growing by 700,000 to 900,000 barrels a day. That growth rate, the most seen in the month of January in 85 years, and the highest in any month since at least October 2002, is a serious setback to OPEC's efforts.
Crude oil is piling up as the global economic crisis has slashed consumer demand for petroleum products like gasoline and diesel fuel. The oversupply that's driving down near-term prices, too, makes it profitable for refiners to continue to amass crude oil inventories, a cycle which analyst Stephen Schork calls the "hamster wheel" effect.
Rising inventories are a further body blow to OPEC, which is reeling from the breathtaking fall in global oil demand and prices. Crude oil futures are down more than 70% from their all-time record highs above $145 a barrel hit in July 2008. Each barrel of oil that goes into storage in consumer countries weakens the cartel's hold on the market and potentially prolongs the price skid, analysts said.
OPEC, buffeted by swooning prices and shrinking global oil demand, pledged to cut output by 4.2 million barrels a day since September, including a biggest-ever 2.2 million barrels a day cut from Jan. 1.
A survey by Dow Jones Newswires showed that OPEC achieved 75% compliance with the January cut.
Lowest Saudi Output Since 2002
Saudi Arabia, the world's biggest oil exporter and OPEC kingpin, even cut output below its agreed level of 8.05 million barrels a day in the month. Saudi output of 7.9 million barrels a day was the lowest since October 2002. That's a 19% drop below the high hit last July.
The Saudis cranked up production to a 25-year high of 9.7 million barrels a day in the summer as crude prices soared to near $150 a barrel.
Now, analysts said, the plunge, alongside oil's inability to recover significantly, will require still deeper cuts by the Saudis and fellow OPEC members to prop up the market. OPEC, which meets March 15 to review its production policy, has said oil prices of $75 or more are needed to cover costs of future oil supplies.
Giovanni Serio, an analyst at Goldman Sachs, said OPEC needs to cut production by a further 1.1 million barrels a day, essentially fully complying its already agreed cuts.
"If OPEC complies entirely with their announced cuts, they would be able to rebalance the market," he said, but expects OPEC to only deliver a further 500,000 barrels a day in cuts.
Goldman sees U.S. crude oil prices holding near $40 a barrel over the next three months, rising to $49 in six months and to $65 in 12 months.
Antoine Halff, analyst at Newedge Group, said he revised his forecast to show global oil demand falling by 1.3 million barrels a day this year, more than twice the level of his earlier forecast, amid the recent slew of weak economic data. For now, he's sticking with a $45 price forecast for this year.
In the U.S., the world's largest oil consumer, early data for January show demand fell by 2.8% to 19.549 million barrels. That's the lowest level for the month since 2002 and marks the 18th straight month of year-on-year declines.
Biggest Surplus Since 1990
That helped U.S. crude oil inventories balloon by the highest level in years. Crude inventories climbed by at least four times the average January rate over the last five years, which is the biggest rise in the month since 1924, EIA data show.
At 346 million barrels, crude stocks are the most since July 2007, when they topped 351 million barrels.
Crude stocks are sufficient to cover more than 24 days of current refinery demand, compared with a five-year average of 20 days, and the highest level since 1995.
What's more, crude stocks are likely to continue to gain. The EIA expects refinery runs in February and March to average 400,000 barrels a day below current levels.
Jan Stuart, economist at UBS Securities, said he expected refineries to slash operations to be below 70% of capacity on occasion in coming months, compared with an 83.5% rate in the Jan. 30 week. That implies a cut in crude runs of about 2 million barrels a day from current rates.
U.S. crude oil stocks haven't peaked in January in 55 years, data from the EIA show, a further indication of likely gains in coming months. Incentives for refiners to bulk up stockpiles are still in place, even as inventory at Cushing, Okla., the delivery point for the Nymex crude contract, stands at record levels.
On Thursday, light, sweet crude oil for March delivery on the New York Mercantile Exchange settled at $41.17 a barrel, up 85 cents, but was $8.39 a barrel below June-delivery crude, providing a tidy profit, even after storage costs, to continue to build inventory.
Copyright (c) 2009 Dow Jones & Company, Inc.
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