For many situations, time will provide the answer, if we are willing to wait long enough. By the end of the year, we will know whether the Boston Red Sox will retain their big lead in the standings, whether the U.S. women’s soccer team won the World Cup, and if David Beckham was able to lead the Los Angeles Galaxy soccer team to the playoffs. In oil markets, the path of stock levels over the remainder of the year will be closely watched. Many analysts expect global oil demand to grow at a strong enough rate that stocks look likely to decline significantly relative to normal rates over the second half of the year, especially if OPEC does not appreciably increase oil production.
EIA, like many others, is calling for much faster demand growth in the second half of the year than seen recently. Table 3 of EIA’s Short-Term Energy Outlook, shows third quarter 2007 global demand 1.7 million barrels over the third quarter 2006 demand level, while fourth quarter 2007 demand is expected to be 1.9 million barrels per day higher than in the last quarter of 2006. This compares to global demand growth of just 0.4 million barrels per day over year-ago levels in the first quarter this year and 1.4 million barrels per day for the second quarter. Part of this pattern is explained by warm weather in much of the Northern Hemisphere at the end of last year and the beginning of this year. But there remains an assumption that high oil prices will not impact demand significantly, in part, because for much of the world, the price increase has been somewhat muted as oil is priced in dollars and the dollar has been falling compared to most major currencies. In EIA’s projections, this expected growth in demand leads to larger inventory draws relative to normal patterns.
While nearly all analysts understand that oil markets are global, some (perhaps, too much) emphasize U.S. oil stock levels, simply because they are current, reliable, highly visible, and released on a weekly basis. As Figure 2 in the Weekly Petroleum Status Report illustrates (scroll down to Figure 2 at the bottom of the link), total commercial U.S. oil stocks (excluding those in the Strategic Petroleum Reserve), remain above the middle of the average range, even as they have fallen since last autumn compared to the normal range. However, using data through May 2007 from the International Energy Agency’s July 2007 Oil Market Report, stocks in the Organization for Economic Cooperation and Development (OECD) Pacific region were at the very bottom of the average range (defined as the average level in each month for the 10-year period 1996-2005 plus or minus one standard deviation) at the end of May this year, as shown below. Clearly, at least in some parts of the globe, there is not much room for stocks to draw further. Should global demand increase as expected, trade patterns will probably shift in such a way that those regions with more stocks (relative to the average range) will likely see a larger stock draw than other areas. This could lead to larger than normal draws in the United States, which could lead to greater, possibly exaggerated, upward price pressure, given the visibility of the U.S. weekly stock data.
While no one knows for sure whether demand will grow as strongly as expected, or even what OPEC will eventually do, we can make estimates based on trends. Recent comments by OPEC officials recently, indicate a possible willingness to increase production in the future, should demand remain strong. While we will know by the end of the year whether or not the Red Sox maintained their big lead in the standings and the impact David Beckham had on the Los Angeles Galaxy fortunes this year, it might take a few months longer than that, given the lag in global oil data, to know whether analysts’ projections for the second half of the year were correct. But, eventually, time will tell if most of the analysts were right or wrong.