2010 Oil Story: Drawing Down the Inventories
Hat tip to the Economist Magazine for catching a key, energy data point from week’s BP Statistical Review: in 2010, the world consumed about 5 mbpd (million barrels per day) more oil than it produced. Anticipating the discrepancy between the two figures, the BP Statistical Review authors write on page 9 of their PDF: Differences between these world consumption figures and world production statistics are accounted for by stock changes, consumption of non-petroleum additives and substitute fuels, and unavoidable disparities in the definition, measurement or conversion of oil supply and demand data.
I agree with the Economist Magazine’s conclusion that most of the difference between 82.095 mbpd produced and 87.382 mbpd consumed came from stock changes. In other words: the drawing down of oil from inventories. Indeed, this was a key driver for oil’s advance last year from the high $70′s to over $90 a barrel. In the chart below, from the latest IEA Paris Oil Market Report, you can see that starting in mid-year, total OECD inventories started a new decline. Moreover, the histograms in the below chart also show the difference to the five year average, which also illustrates the global stocks drawdown. This coincided by the way with a resurgent, mid-year advance in the price of oil from a low of $69 to $92 by year end.
A data point of interest that the Economist did not mention, however, is that BP’s oil consumption data include global biofuels, while BP’s oil production data do not. Does the inclusion of biofuels in global consumption skew this figure meaningfully higher? My calculations show the following: No, it does not. Switching to BP’s preferred Mtoe energy unit (million tonnes oil equivalent), I find that total biofuels production was only 59.26 Mtoe in 2010. Compared to 4,028.10 Mtoe of oil consumed, there is at best 1.47% biofuel consumption embedded in BP’s total consumption figures for oil. Thus, the story of 2010–and it’s a very important story indeed–is intact. Unable to meaningfully increase global oil production to meet demand, the world ate through inventories. You have been warned.
Trading Note: There was some market chatter today that a concerted release of oil from OECD inventories could be considered to drop prices from current levels. But you can see the problem: if markets were already so imbalanced in 2010 that consumption outran production by 6.4%, then a discretionary release of oil from OECD stocks will only force the global futures market to price in less of a safety cushion in the event of war, or some other serious disruption to a major supplier like Russia or Saudi Arabia. Inventories are meant to manage disruption in flows. Not the inconvenience of “high prices.”
Further Research: Nota Bene that BP’s Oil category includes natural gas liquids (NGL’s). NGL’s are not oil. Not in any sense. Furthermore, NGL’s only contain 65% of the BTU of oil. In recent years, as crude oil production has oscillated below a ceiling, there has been growth in NGL supply. Aggregating NGL supply into “oil” categories is misleading to say the least. For a broader discussion of this accounting issue, see my essay at The Oil Drum: Secrecy By Complexity: Obfuscation in Energy Data, and The Primacy of Crude Oil.