Oil: OPEC/Russia -- not so fast on oil production increases (Part 2)

This post discusses the five year average inventory that is part of the calculus when discussing increasing production by OPEC/Russia. I also note concerns about a lack of capital investments.

If you click on this IEA link, they have a graph comparing the five year average inventory vs. the actual stock. In 2016, actual stock was 400 million barrels above the average. Now they're basically flat. Of course, the current five year average takes into account the 2016 inventory, but it is still a dramatic turn-around for oil inventory to now be below the average.

Perhaps another way to look at things is on an absolute basis due to the fact that the five year average is distorted by the 2016 figures. YCharts shows that OECD (Organisation for Economic Co-operation and Development) inventory hit a high of around 4.7 billion in July 2016. It is currently estimated at 4.4 billion. It hit a low of around 4.2 billion in December 2013. In prior blog posts, I mentioned that estimates are for inventory to decline by 1.3 million barrels per day. If that holds, we could get back to 2013 inventory levels by the end of this year. That would indicate much higher oil prices. Of course, that low level would also be distorted by the fact that OPEC/Russia are holding 1.8 million barrels off the market (as well the fact that Venezuela is having a crisis that is causing their output to decline dramatically).



As a little side note on a lack of capital investments, World Oil had this to say back in early May:

But Saudi Arabia says the “mission is not accomplished yet” and is urging fellow producers to keep output restrained to fulfill a new priority: encouraging companies around the world to invest more in future supply. The Organization of Petroleum Exporting Countries isn’t the only voice warning about a lack of spending on new projects. Influential figures from the International Energy Agency to the boss of oil major Total SA have warned a supply shortage could emerge early next decade after a period of deep cuts in spending. Under-investment could push prices as high as $300 a barrel within a few years, prominent hedge-fund manager Pierre Andurand said this week. 

First, it is interesting that Saudi Arabia did say, a month after this article, that the mission was sort of accomplished. Then of course, during that period, the US pulled out of the Iran deal.

Second, note the concern regarding a lack of investment from entities ranging from Saudi Arabia to the IEA to oil major Total. And note how Pierre Andurand is predicting $300 a barrel within a few years!

I think the oil markets as of now have backed off the idea of any immediate increase in production by 800,000 to 1,000,000 barrels per day. It is also known that Saudi Arabia would like oil to be around $80 when they IPO. Based on market reactions, increasing production by those levels would not result in $80 oil. So my thinking is that any increase before the end of the 2018 OPEC/Russia agreement will be far lower.