Even as US crude oil inventories just hit a fresh record high for another week, both in Cushing and across all other regions, a more curious accumulation of excess oil inventory has emerged: according to the IEA, global oil production exceeded consumption by just over 1 billion barrels in 2014 and 2015.
As Reuters reports, crude oil production exceeded consumption by an average of 0.9 million barrels per day in 2014 and 2.0 million bpd in 2015. Of this 1 billion barrels which the IEA believes was produced but not consumer, some 420 million are said to be stored on land in OECD member countries and another 75 million can be found stored at sea or in transit by tanker somewhere from the oil fields to the refineries. This means that as of this moment, about 550 million "missing barrels" are unaccounted for "apparently produced but not consumed and not visible in the inventory statistics."
As John Kemp writes, like most "plugs", the missing barrels are recorded in the "miscellaneous to balance" line of the IEA's monthly Oil Market Report as the difference between production, consumption and reported stock changes. The miscellaneous item reflects errors in data from OECD countries, errors in the agency's estimates for supply and demand in non-OECD countries, and stockpile changes outside the OECD that go unrecorded.
The current IEA data reveals that there is a miscellaneous to balance item of 0.5 million barrels per day in 2014 and 1.0 million barrels per day in 2015.
This is not new: missing barrels have been a feature of IEA statistics since the 1970s, and as Reuters adds over time, errors have occurred in both directions, and have ranged up to 1 million or even 2 million barrels per day.
And as Reuters adds, while most of the time, the oil market ignores the miscellaneous to balance item, but it tends to become controversial when it becomes very large, either positive or negative. Such as now. Furthermore, the situation is additionally compounded by the massive documented inventory glut not only in the US but around the globe, and certainly in China which, as reported yesterday, reported a record amount of oil in January even as demand is said to have been declining.
This is what happened the last time there was an implied glut on par with the current one:
The last time the miscellaneous to balance item was this large and positive (implying an oversupplied market) was in 1997/98 when the issue triggered fierce criticism of the IEA's statistics.
Critics accused the IEA of over-estimating supply, under-estimating demand, contributing to perception of a glut, depressing prices, and causing unnecessary hardship to the oil industry. Senator Pete Domenici, chairman of the U.S. Senate Budget Committee, asked the General Accounting Office to investigate the IEA's statistics and the question of missing barrels. In a report published in May 1999, GAO concluded "missing barrels are not a new condition, and the amount and direction of missing barrels have fluctuated over time".
"At any point in time, the historical oil supply and demand as well as the stock data reported by IEA could be overstated or understated by an unknown magnitude."
That it true, although the error item it may also indicate just how much over (or under) supply there is. The GAO concluded then that it was not possible to "quantify how much of the missing barrels are due to statistical limitations and how much are the result of physical oil storage in unreported stocks".
Some other comparisons:
In 1997/98, the market was oversupplied by 2.1 million barrels per day compared with total demand of around 74 million barrels per day, according to the IEA.
In 2015, the oil market was also oversupplied by 2.0 million barrels per day but consumption was running at more than 94 million barrels per day, around 25 percent higher.
To be sure, episodes of massive imbalance usually even out, and following the 1997/98 episode, the missing barrels that accumulated in unreported non-OECD storage were drawn down in 1999, according to the IEA ("Oil Market Report", IEA, Dec 1999). In December 1999, the IEA wrote: "The weight of (the) evidence is that the missing barrels did exist and that they have now returned to the market."
What helped the 1998 glut was that by the end of 1999, the oil market was seeing excess demand and prices were rising. But the rapid recovery depended on very strong economic growth in North America and Asia (after the East Asian financial crisis in 1997/98).
Another critical factor was the substantial production cuts by OPEC in conjunction with production restraint from non-OPEC countries. And it was both heralded and caused by a shift in the forward price curve from contango to a state of backwardation.
As Reuters concludes, the events of 1999 illustrate the factors needed to clear an inherited glut of oil (strong demand, production restraint and a shift in the shape of the forward price curve).
There are two major problems: this time around demand is declining - especially in trade-dependent distillate demand - while debt across the entire world is at record highs, and makes a fiscal stimulus improbable. Worse, following the November 2014 OPEC fiasco, the cartel effectively no longer exists. Furthermore, major oil exporting countries have not so far agreed to cut production, unlike 1998/99, and in fact Saudi Arabia has openly rejected the idea. And finally, futures prices remain resolutely in contango, which is both a symptom of excess stockpiles and creates a financial incentive to continue holding them. As Reuters observes, there is no sign of the market moving into backwardation yet, which would indicate the supply-demand balance was shifting and would also create a financial incentive to release oil from storage.
Kemp's conclusion:
Several key OPEC and non-OPEC producers have announced a provisional production freeze which could speed up the rebalancing, assuming it is implemented.
But it might not be enough to eliminate the glut quickly; outright production cuts may be needed to accelerate the process, depending on what happens to demand and production from other countries.
This is also why Goldman yesterday released its latest bearish report on oil, in which it said the "commodity rally is not sustainable" and worse, "the force of their reversal has created a new trend in market positioning that could run further. However, the longer they run, the more destabilizing they become to the nascent rebalancing they are trying to price."
In other words, the sharp, brief rebound in prices, means that a long-term sustainable rebound in prices becomes that much less probable.
The bottom line is that the IEA's calculations are likely correct, and end markets are merely misreporting due to commercial interests: "In 1997/98 episode, the IEA concluded most of the missing barrels went into non-OECD storage and uncounted OECD inventories . In the current episode, it is also very likely some of the 550 million barrels unaccounted for in 2014/15 have gone into unreported storage outside the OECD."
Places like China. China's government is known to have been filling its Strategic Petroleum Reserve. More barrels are likely to have gone into commercial storage in China and in other countries outside the OECD.
The question then is how much longer can all this excess production be stored quietly away from the public's eye. We already know that Cushing is denying some storage requests, and that as a result the US is storing oil in cargo trains, and exporting it to Europe, in effect making the entire world a series of communication oil vessels. Still, absent some dramatic supply cut in the near term, or just as dramatic rebound in demand, what happens when not just Cushing but the entire world's inventory capacity is used up?
That is the true fundamental bearish case, one which every daily short squeeze in oil makes increasingly more probable.