Amid rising concerns about the risk of a prolonged disruption in Libyan oil exports, crude oil inventories in Europe and elsewhere warrant close scrutiny from market participants. The loss of Libyan crude oil supply will likely be partly offset by two factors: on the supply side, higher exports from Saudi Arabia and other producers; on the demand front, a temporary reduction in Asian consumption following the devastating earthquake and tsunami in Japan. Even so, the loss of Libyan supply is likely to draw down European stocks, at least temporarily, given the expected lag in alternative supplies. On the other hand, market participants might take comfort from the fact that any stock draw will come from a high inventory base. Commercial liquid fuel stocks in Organisation for Economic Co-operation and Development (OECD) countries surged in 2009 and most of early 2010 as a consequence of the financial crisis and attendant demand dip (Figure 1), culminating at an all-time high of 2,793 million barrels for total liquid fuels in August 2010 and 1,043 million barrels for crude oil in April 2010. World consumption has bounced back since then to above pre-crisis levels and the excess inventory has shrunk, but stocks remain high by historical standards. As of January 2011, the International Energy Agency estimated total OECD commercial liquid fuel inventories at 2,695 million barrels, 17 million barrels above the January average of the last five years. Preliminary January 2011 crude oil stocks had slipped to 960 million barrels (Figure 2), 3 million barrels below the five-year average, but remained high in demand cover terms, while refined product stocks were significantly above average. But the comfort of that safety cushion needs to be placed in context.
Detailed oil inventory statistics are provided weekly by the United States and Japan and monthly by other OECD members. Saudi Arabia and several other non-OECD countries also provide monthly figures, which are made available through the Joint Oil Data Initiative (JODI) run by the Riyadh-based International Energy Forum. It is easy to see why oil traders like to take their cue from those reports, and, most of all, from the timely U.S. weekly surveys. Under the best of conditions, inventory data provide a useful snapshot of supply/demand balances. Stocks build when production exceeds consumption or draw when the reverse is true. In a well functioning market, higher inventories provide a margin of comfort, letting the market cope with unanticipated supply disruptions or keep up with faster-than-expected demand growth. Historically high U.S. crude oil stocks in the last two years have inflated OECD aggregates and are the main reason why global crude oil stocks look so high. However, several factors currently undermine the usefulness of U.S. and OECD stock statistics as a market signal and an indicator of global oil fundamentals.