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Monday, March 19, 2007

Oil Storage Down More Than OPEC Cuts

This is an interesting post from an participant in an Investor Village Message Board

If this analysis proves correct then I would definitely hold on to my "oily" income trusts such as Harvest and Crescent Point.

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According to March 13, 2007 Wall Street Journal the size of the drop in Oil storage levels have been:

1) IEA - Q4 93 million drop
2) EIA - 100 million in US since Oct
3) CGES - 160 million drop world in 6 months

It looks like all the estimates agree with each other, and in 6 months we fell 160 million.

How much of OPEC cuts made up that drop?

It takes 6 weeks for a drop in production to reach the market, so in the 10 weeks of 2007, only 4 weeks worth of cuts at 1 million a day are in the data. At 1 milion a day of lower production that will be about 30 million reduction reaching the market.

The other 6 weeks of 2007 had cuts from the end of 2006 and were at .5 million a day, so add another 20 million.

In 2006 we then had 3 months at much less than .5 average, but I will use .5 for this analysis, or 45 million.

Total OPEC cuts reaching the market are at best 95 million barrels (I suspect I am 20 million too high), while world inventories during this time dropped by 160 million.

If OPEC had been pumping at their max rate, world inventories would have dropped by 65 million barrels over the last 6 months.

What this says is that this winter world oil demand was higher than max world oil production capacity for the first time ever!

For 2007, world oil demand is projected to be up by around 1.5 million barrels a day, while production growth appears after depletion to be having a problem to grow.

OPEC has engineered a drop in stroage level such that going into 2007 Q3 this year without a storage cussion. With growth in overall demand, and cycle demand coming in during Q3/Q4, the swing in demand could be 3 to 4 million a day by Q4.

With 1 million of spare capacity, and questionable net growth in production, next fall will be interesting.

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