Stop reading the tea leaves on global inventories


The biggest question in the oil market is whether some of the biggest oil producers in the world will follow through with pledged output cuts — causing the global oil market to tighten.

The best indication for underlying conditions will be global inventories. Saudi Arabian oil minister Khalid al Falih said December 19 that he expects global oil stocks to fall during the first quarter of 2019.

“We remain focused on fundamentals, I can tell you we will achieve balance between supply and demand in 2019,” he told reporters.

In January, Saudi Arabia will export 7.1 million barrels per day (bpd), a decrease of 800,000 bpd from November, Al Falih said this week.

But how can anyone track whether Al Falih is true to his word?

The drawbacks with traditional sources of inventory data are limited geographic scope (US-only) from the US Energy Information Administration or timeliness (2-month lag) from the International Energy Agency.

At Ursa, we publish weekly inventory data on 150 sites of the most material, market-moving sites around the world. The data is based on direct measurements using satellite-based, synthetic aperture radar (SAR).

This dataset provides traders with a timely pulse on the market. It’s a fact-based way of solving the mystery of supply-demand balance, instead of trying to read the tea leaves.

Our recent data showed significant builds in global crude inventories from October to early December, setting the stage for the bloodbath in oil prices at the end of 2018.

The places driving those builds were Cushing, Oklahoma as well as a handful of sites in China (Changxing, Dalian, Ningbo, Zhoushan).

The chart below shows significant and consistent builds at three of those locations during that stretch, with few exceptions.



Source: Ursa

Cushing and Chinese inventories both kept rising in December. However, global stocks stopped building led by draws at Ceyhan (Turkey), Le Havre (France), Mailiao (Taiwan) and Houston.

If this trend continues and stocks drain, as Al Falih vowed, that would be noteworthy.

The first three months of the calendar year are typically times of weak refinery demand because units get taken offline for planned maintenance.

OECD inventories have drawn once in the first quarter from 2008-2018, according to the International Energy Agency. In 2018, OECD inventories fell by 111,000 bpd. During the previous ten years, OECD inventories built 568,000 bpd on average.

Al Falih believes agreed production cuts effective January 1 will be enough to spurn counter-seasonal draws.

A coalition of OPEC and other producers, led by Russia, pledged December 7 to cut production starting January by 1.2 million bpd relative to October levels.

The agreement did nothing to stop the plunge in oil prices, which continued unabated until December 24 when crude futures bottomed.

Oil prices were also trapped in a negative cycle caused by economic fears and gruesome losses in the equities market.

A measure of calm after Christmas when traders returned to their desks helped turned the tide across asset classes, including oil.



Source: NYMEX, ICE via MarketView

Reports of OPEC production dropping in December by 460,000 bpd, seen as an early sign of the cartel’s commitment to those output cuts, also helped firm prices.

Yet the only true barometer for measuring OPEC’s success will be global inventory levels. What do you think will happen?




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