China Stockpiling Oil; OPEC Cuts Forecast

There’s a lot happening in the oil market this week so let’s get straight to it.

China syndrome -- China is the latest government to stockpile oil inventories – buying up millions of barrels of oil at cheaper prices and storing them for a rainy day, and to avoid oversupply in its own market.

That’s the word from sources in the Chinese government, who told China Daily that the plan is to stockpile 10 million metric tons of fuel by 2011. Oil reserves are fairly low right now, although Chinese insiders say that inventories may reach three million tons this year and 6 million tons in 2010.

What would that mean for global oil suppliers and for China, itself? Well, global supplies are building up, too, so oil producers are willing to sell oil at low prices to reduce their own inventories. After all, oil is a market-driven commodity, and producers will see at $35 or $40 if they have to. And China, which reportedly is planning a three-phase stockpiling of 37 million tons of oil, in total, is a big buyer right now. For China, the storage of cheap oil will help calm domestic selling prices, and give it stronger control over its own energy policy heading out (hopefully) of a global recession in a year or two.

Oil prices drop – It’s not just China -- inventories are at the core of the international oil market, too. According to the U.S. Energy Dept., oil demand is in decline due to the prolonged global recession. Consequently, oil supplies have risen in 18 of the past 20 weeks, and now oil stockpiles are at the highest levels since July 2007. Furthermore, the energy consultant group Wood Mackenzie says that oil demand will decline by 1.7 percent to 84.3 million barrels a day for the rest of 2009.

That bearish environment just keeps adding pressure to the price of oil. Crude oil prices continue to languish under $40 per barrel, trading at around $38 per barrel early this week amidst fears that the rest of the world, like China, is experiencing a significant slide in demand. As gross domestic product (GDP) drops in bourses around the globe, oil traders are nervous, at least for the short term. Take Japan. The Land of the Rising Sun is seeing a decline in GDP, falling to the lowest rate since 1974. If Japan, the globe’s biggest economy after the U.S. and China, and its tens of millions of energy consumers fall a few economic notches, that’s going to continue to hurt global oil demand and keep prices down. Maybe that’s one reason why OPEC will once again slice production in March if the oil remains in the $35 to $40 range.

OPEC Cuts Forecast – Speaking of OPEC, and of global energy consumption, it’s latest forecast is out and it’s not a positive one. In the forecast dated February 10, OPEC cut its demand estimates for a sixth straight month. In doing so, the downbeat language that OPEC report writers used was telling, with “a sudden and massive” decline in demand as the overriding reason for the recent rise in inventories. The report cites an oil daily production schedule limit, on the upside, of 24.845 million barrels from Jan. 1 for its 11 members with quotas. That’s down 4.2 million barrels a day since September, 2008. Again, all signs are pointing to further production cuts from OPEC, which supplies 40% of the world’s oil.

As I said, there’s a lot on the board this week for the oil sector, even the news isn’t as rosy as we’d like. Due to the severe economic decline, even prices for West Texas Crude, where I make my living, are at five-year lows. With storage facilities topped off, and demand at historic lows, all we know is that time heals all wounds.

Sooner or later, we’ll get out of this fix. But it will take some time.





Posted 02-16-2009 3:40 PM by Bret Boteler
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Where market factors converge : Bret L. Boteler wrote Where market factors converge : Bret L. Boteler
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