London, 23 May 2011: Reuters

The International Energy Agency's (IEA) exceptional call on oil-exporting countries to provide more crude urgently in a bid to avoid further damage to global growth has come too late. Soaring food and fuel prices have already started to act as a drag on consumer spending and growth in the United States and other oil-importing countries. Dallas Fed President Richard Fisher Thursday blamed high gasoline prices for having a "retarding effect" on the recovery. But there is no evidence of a physical shortage of crude -- even the light sweet sort prized for its high gasoline content and easy refining. Surging prices have already restricted demand in the United States and other advanced economies, offsetting demand growth in emerging economies and ensuring the market is balanced.

Instead prices have been driven higher by an expectation there will be shortages in future - towards the end of 2011 and in 2012. The IEA is really calling on OPEC and Saudi Arabia in particular to over-produce and flood the market now in a bid to build up inventories and push prices lower to break the back of a speculative rally.

THERE IS NO SHORTAGE OF OIL

Consider a few facts:

(1) Commercial crude inventories in the United States stand at 370 million barrels -- the highest since April-May 2009, in the depths of the recession, and before that 1990, according to the Energy Information Administration ( EIA). There is no shortage of crude for refining. In May 2008, at the height of the price spike, crude stocks were just 325 m illion barrels (http://graphics.thomsonreuters.com/ce/CRUDE.pdf).

(2) Commercial oil inventories across the OECD stood at 2.643 billion barrels at end-March, equivalent to 58.8 days of consumption, and 2.7 days above the five-year average, according to the IEA. Preliminary data for April show a small seasonal stock build in April in line with the five-year average.

(3) U.S. gasoline stocks have witnessed the steepest draw on record falling 35 million barrels (15 percent) from 241 million to 206 million since February. But dwindling stockpiles have been driven by poor refinery utilisation rates, sluggish imports and strong exports to Latin America, rather than domestic demand. EIA data shows domestic consumption below 2010 levels despite the economic recovery.

(4) U.S. refineries have been processing a little over 14 million barrels per day of crude in recent weeks, down almost 1 million barrels per day compared with 2010, and 2 million compared with 2004-2005. There is plenty of refining capacity available. The operating rate was 83.2 percent last week compared with 87.9 percent in 2010 and 2008, and scarcely higher than in the trough of the recession in 2009 (http://graphics.thomsonreuters.com/ce/USREFTHRUPUT.pdf).

(5) Before the sell off on May 5, hedge funds and money managers used WTI-linked futures and options to amass a call over 363 million barrels of crude, the largest ever speculative long position, according to the U.S. Commodity Futures Trading Commission. If other speculative positions are included the total long amounted to 501 million barrels, more than five days of worldwide consumption. That was just WTI futures. It takes no account of the speculative call on products such as gasoline or other crudes such as Brent (http://graphics.thomsonreuters.com/ce/CFTCOIL1.pdf).

(6) If U.S. refiners anticipated strong demand for gasoline they have an abundance of crude to produce it and plenty of refining capacity. Instead refineries stand idle. If there was expected to be strong demand importers could bring in gasoline from Europe. Instead imports are running at or below average rates in recent years (http:// graphics.thomsonreuters.com/ce/GASOLINEIMPORTS.pdf).

(7) Refining margins in the United States seem high. But that is because observers are comparing futures prices for gasoline delivered in New York (linked to international markets) with domestic crude futures (weighed down by local oversupply in the Midwest). Comparing wholesale prices with feedstock U.S. refiners outside the Midwest actually use (Brent, Bonny or Mars) margins are strong but not exceptional (http://graphics.thomsonreuters.com/ce/GASOLINE-MARGINS.pdf).

(8) Both the IEA and the EIA have cut their demand forecasts as high prices ration and perhaps destroy demand, especially in the advanced economies. The IEA now forecasts total OECD oil consumption will fall 230,000 barrels per day this year, mostly as a result of weaker demand in North America, after remaining essentially flat in 2010.

FOCUS ON PRICES NOT STOCKS

There is no evidence for a shortage of appropriate crude in the short-term. Prices have surged largely on expectations about potential shortages in future. There might or might not be a shortfall in later in the year and into 2012 depending on how much demand restraint occurs.

But the IEA Board of Governors is pressing OPEC for more oil now. It cited short-term pressure: "As global demand for oil increases seasonally from May to August, there is a clear, urgent need for additional supplies on a more competitive basis to be made available to refiners to prevent a further tightening of the market".

A neutral observer might ask "Why?" Refiners are not using all the crude they have at present. Offering them even more is not going result in more product availability. In any event, there is no guarantee they would process it rather than simply add it to inventory.

The IEA's real purpose in calling for more crude sales is different. The agency seems to want to shift OPEC and Saudi Arabia's focus from targeting physical market balances to prices.

Riyadh insists there is no physical need to add more barrels. Saudi Arabia has even cut output in response to slack demand. But the consuming countries fear the market is headed for a temporary equilibrium of plentiful stocks, big speculative positions, high prices, falling demand and slowing global growth.

As market participants are fond of saying, the best cure for high prices is high prices. Ultimately, high prices and falling demand will drive the speculative length out of the market. But global growth will slow first.

SPECULATORS IN THE CROSS-HAIRS

The IEA wants Saudi Arabia and other producer countries to knock the market onto another trajectory by raising output unilaterally. The agency wants stocks to build, and force crude prices down. Falling crude prices might even fatten refining margins and persuade refiners to ramp up their processing, ensuring that product stocks build as well.

If the investment community wants claims over half a billion barrels of oil, the agency is implying producers should give it to them. It is transparently political move that reflects pressure from Washington. The Obama administration is sceptical about whether the recent run up in prices is justified on a strictly fundamental basis. But rather than taking aim at speculative positions directly, it wants to undermine them by pressuring Saudi Arabia to flood the market.

In April, the U.S. president argued "It is true that a lot of what's driving oil prices up right now is not the lack of supply. There's enough supply. There's enough oil out there for world demand."

Instead, the president blamed speculative bets for driving prices up. Few people took his comments seriously at the time, since the market is used to anti-speculator tirades from politicians. But the desire to break the back of a speculative rally has produced fruit in the form of the IEA governors' statement.

Now the question is whether Riyadh will respond.

Ends  --

Reuters - for Commodities Now