During the oil price runup of 2008, economists liked to harangue market participants and observes who thought a move that rapid could not be solely the product of fundamentals. Where were the inventories, they demanded. If the price was “too high” as in excess of supply and demand, surely there would be excessive inventories.
There were reasons the story wasn’t that simple (oil consists of multiple grades, pricing is not based on spot or the nearest futures contract, but on a formula, there were in fact diesel inventories building up in China, and because oil storage capacity is limited, it is often “stored” by not pumping it).
Now we have the specter of oil bumping up against above ground storage, and no sign that things will get better soon.
From the Telegraph (hat tip reader Michael):
Rotterdam, Europe’s biggest port, is running out of room for more oil, US reserves are at a 19-year record and tankers are being used as floating storage off Britain’s south coast, even though OPEC is reducing production.
“From a commodities point of view, world trade is appalling and the demand is just not there,” said Ahmad Abdallah, commodities analyst at Gavekal, the economics consultancy. “All inventories are rising – they are bursting at their seams.”
Oil prices rose to a five-week high last week above $53 a barrel in line with the recent bull run on the world’s equity markets.
Yet despite an OPEC decision last November to cut output by a record 4.2m barrels a day, a move which began to come into effect in February, the fall in demand has been even more striking.
Goldman Sachs estimated last week that global storage capacity could be exhausted by June….
Mr Abdallah said official estimates of oil usage for this year had been based on more optimistic assumptions than economic reality.
An average of analysts’ predictions reckons on a reduction in demand of 1.5m barrels a day for 2009 over last year, while the International Energy Agency is predicting a fall of 2.5m barrels, but an estimate based purely on current economic growth figures would put the overall decline at 3m.
He said it was a similar story in other commodities, with companies building up inventories while prices were cheap. “I can’t see demand picking up for the rest of this year,” he said. “Even if it picks up next year it is going to be from a very weak base.”
Goldman Sachs set a price target 10pc lower than at present, at about $45, for July, while Peter Voser, chief financial officer for Royal Dutch Shell, told reporters last week that it was “difficult to see an uptick in the oil or gas price” in the next 12 to 18 months…
“The further (the oil price) rises, the more sceptical you become,” said Mark Pervan, head of commodities research at ANZ. “We are operating in a global recession and oil markets are a proxy for global growth.”