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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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Location: Washington, D.C.

greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

04 March 2006

Oversupply of crude?

Edmund M. Daukoru, OPEC’s president and Nigeria’s oil minister, recently completed a tour of Washington where he said that “the market is indeed well supplied with crude today.” He said OPEC sees spare capacity at about 2 mbd, compared to other more gloomy estimates—the Energy Information Administration (EIA) claims only Saudi Arabia has spare capacity left and that’s about 1.1 to 1.6 mbd, although other sources put spare capacity for Saudi Arabia slightly higher at 1.5-1.8 mbd. Mr. Daukoru’s point, however, is to highlight that there is a slowdown in demand and that the supply-demand fundamentals are sound. Here is how the Oil & Gas Journal reported Mr. Daukoru’s talk at a luncheon sponsored by the US Energy Association:

“Daukoru said more downstream oil capacity needs to be developed. He noted that some of the integrated oil companies that once absorbed downstream shocks with more-profitable upstream operations have sold refining and marketing holdings to independent companies less able to absorb the jolts. … Noting that current oil prices are still lower in real terms than those of the early 1980s, he said OPEC tries to stabilize the market but has little influence over downstream bottlenecks, intense speculation, geopolitical events, and natural disasters.”

I have created this graph of commercial crude and gasoline stocks to show that there is evidence to suggest that what Mr. Daukoru says may be true. To be sure, this is data drawn from the US market alone, but they do highlight important realities. The first is that the excessive pressure of the two hurricanes, reflected in the dip in the second half of 2005 has eased. There is naturally a seasonal buildup in gasoline stocks, though even before the cyclical trend, there existed already a strong recovery in stocks, at about the level of late 2005. Crude oil stocks have also recovered, and the end of the graph suggests a slight increase in stocks, which could be attributed to both excess supply and downstream bottlenecks (mainly the inability to refine crude).

The two trends taken together suggest that there might be a slight glut, though not enough to drop prices. But as OPEC meets March 8, this is the picture they will be discussing. And it should not come as a surprise if the ministers decide to trim production a little bit.

References:

The data for the graph comes from the EIA (link). Reports of the visit from Xinhuanet (link) and Nick Snow, “Daukoru: OPEC sees spare capacity market overlooks,” Oil & Gas Journal Online, 3 Mar 06. Estimates for spare capacity from EIA can be found here (link), and this paper from CSIS offers a slightly higher spare capacity estimate drawn from the Saudi National Security Net Assessment Project (link)

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