Crude oil is overly sensitive to the economic and geo-political outlook. The renewed pessimism about the state of the world economy and its related forecasts has affected greatly the demand of crude oil globally.
The declining oil futures in March bear testimony to this harsh reality, which could easily spill over leading to a decline in crude oil inventories. The production of crude oil by the Organization of Petroleum Exporting Countries) OPEC in March 2013 declined following politically instigated disruptions in Libya, Nigeria and Iraq. The seasonal maintenance exercise at refineries also has in a way contributed to the decreased output to mention the least.
The supply chain of the global oil industry has crude oil inventory as a dynamic component. The significance of these inventories lies in the buffering of changes in the supply and demand pattern of crude oil. Contrary to the modus operandi in other commodities where production directly link and feed into demand, the crude oil market makes use of both fresh production and inventories to satisfy the demand for oil. In the event of supply and demand shocks, crude producers respond by regulating the crude oil reserve. Following its dynamic position within the crude oil supply chain therefore, inventories reflect the market sentiments as far as pressures on oil prices are concerned.
Factors Affecting global oil inventories
The forces that work for and against crude oil inventories are many and varied. They range form technological where advances in innovations leads to greater production levels and enhanced storage capacities. Government fiscal and monetary policies including taxation also play a role in the reshaping of the inventory levels of crude oil globally. Political unrest has to an extent contributed to supply shocks and indirectly therefore exposing the oil reserves to exploitation in order to bridge demand gaps.
All this said, two factors still remain the major determinants of inventory levels in the world:
a) General expectations in price movement-when future prices are expected to be on the upswing, economies would want to build their reserves so as to save themselves from the extra pennies in future purchases. When the prices on the other hand are expected to fall in future, economies draw down on their reserves with the hope of building them up at a lower cost in future.
b) Supply and demand uncertainties-crude oil supply and demand expectations shape the inventory levels in most economies. The decision for instance by OPEC way back in 2006 to lower their output in the last quarter led to a reduction in inventory levels a situation that in turn led to the US prices to stick around $60 a barrel.
The cause of the inventory change notwithstanding, crude oil inventories remains a powerful barometer for the status of the market; it can either be overproduced or over demanded. Over production is normally triggered by high oil prices as producers rush in to make a quick buck. This in the medium term leads to market saturation and bottoming of prices.
The cyclical nature of oil inventories
Interestingly, the movement of crude oil inventories has adopted a cyclical pattern. During summer oil inventories increase while in winter the exact opposite happens. The rationale behind this is that cold temperatures occasion a demand in heating oils and other residual fuels pushing up demand relative to supply. This leads to a drawing of the existing inventories. During summer supply exceed the demand of petroleum inventories leading to build up.
The Department of Energy (DOE) in the United states is a powerful resource and statistical basket for crude oil inventory statistics.