Commodities | Nov 24 2010
By Chris Shaw
According to Barclays Capital, it is the market's perception inventories are high and likely to remain at levels above that associated with a tightening market that are constraining oil prices at present.
In the view of Barclays, this is obscuring the fact inventory dynamics are actually far more constructive, as on-land OECD stocks actually fell in the September quarter. The decline was enough to see the size of the inventory overhang, as measured by the difference to the five-year average, fall to 55 million barrels. This is about half the level as at the end of the June quarter.
In regional terms, Barclays notes stock levels are about normal in Europe, well below normal in Asia and well above normal in the US. The latter is not expected to be sustained as Barclays suggests with floating storage now gone and with inventories outside the US now balanced, global tightening should soon start to be reflected in US data.
Inventory numbers in recent weeks support this outlook, Barclays noting US inventory overhang has fallen by 30 million barrels or 33% since the end of September.
Barclays sees this as the final step in an inventory normalisation process that extends back to the middle of 2009, as since that time around 140 million barrels of offshore storage has been eliminated and OECD inventory overhang has fallen by around 130 million barrels. When looked at in this context, Barclays suggests the current 55 million barrel above average position in OECD stocks is not so significant.
Given demand remains strong, non-OPEC supply growth is fading and there are no signs of any increase in OPEC output. Barclays' expectation thus remains for a deficit in the physical oil market in coming months. This should see inventory levels slowly transition to a positive for both market sentiment and prices, predicts Barclays.
