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We are going to answer the question above, but to get there we have to begin by assessing the landscape of current oil balances. To start, the drawdown on global petroleum inventories since OPEC+ deal was affected in April 2020 stands as the largest in history. We estimate 640 million barrels have been removed from commercial stockpiles with another 96 million barrels drawn out of emergency stockpiles.
If you do not engage in the fine print of oil supply and demand — and we assume most of you reading this do not — we would ask you to trust us in asserting this drawdown materially tightened the world’s oil balance. This was contrary to what was expected by almost all market watchers who, a year ago, “knew” oil inventories would rise.
For the current year, the consensus is again projecting a global oil inventory build. It feels as if the consensus went from “knowing” oil inventories would build last year to now “knowing” they will build this year. As a matter of record, global petroleum inventories so far this year have been drawing down by about a million barrels per day.
Since inventory changes are the intersection of supply and demand factors, being aware of a lean global inventory backdrop is critical. Lean inventories make the global oil system less able to deal with a supply shock.
Another consideration in the equation is spare oil production capacity. When Iraq invaded Kuwait in August 1990, the two countries’ 4.2 million barrels per day of exports were lost overnight, literally. The rest of OPEC was able to make up for that lost supply within a few weeks.
Currently, there are only a handful of OPEC countries that have spare production capacity. We already forecast that this would become a market feature later in 2022 as the demand recovery continues to unfold and as non-OPEC supply gains prove disappointing. In our forecast, importantly, we did not allow for any unplanned supply outages. We made note of this in our previous columns for Arab News, but that is not the point. The point is we are facing potential supply losses from Russia that may be sizable.
We will be blunt in noting that there is no data available that can measure just how much of Russia’s oil exports and production have been affected, as yet. There have been indications that some European refiners walked away from normal purchases of crude out of fear of being sanctioned for taking Russian oil. It has been reported that some ships carrying Russian crude and refined oil products have not been allowed to enter European ports as is usually the case owing to similar issues. Even so, we still do not know what the sum effect has been on Russian production.
Last week, the France-based International Energy Agency stated that it expects the effect of various sanctions, and the above-noted buyer hesitancy, to result in a cut in Russia’s oil production of 3 million barrels per day by April. We do not have a sense of whether that figure has merit, but should that projected loss occur, it will represent a cataclysmic supply hit to the global system. While a 3 million barrels per day cut in Russia’s oil production is smaller than the supply loss that occurred after Iraq invaded Kuwait, current spare production capacity is not sufficient to counter that effect.
You might think that emergency oil inventories held by Organization for Economic Co-operation and Development nations could help fill the gap. The total current OECD emergency stockpile would cover just 50 days of the above projected Russian supply cut. This means the full deployment of the OECD’s entire emergency stockpile would initially slow the pace of the oil balance becoming over-tightened. So, the answer to this column’s headline is — not without dramatically higher oil prices. A situation we have been discussing at length with our clients.
• Michael Rothman is the president & founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986. He is also the author of “Cornerstones of Life” which is available on Amazon.