Street Capitalist: Event Driven Value Investments

In my previous post, we discussed just one of the geopolitical factors that could cause oil prices to spike. Why do these geopolitical issues matter? Because they have the potential to affect the supply of oil. Let’s have a rundown of what we know so far about oil’s supply right now and what the future projections are.

The Inventory Numbers

Most of the pundits are saying that oil’s rise from $70 to the $95-$96 range has been driven by things like a declining dollar (which oil is denominated in) and the geopolitical risk abroad. However, the inventory numbers we saw just a couple weeks ago indicate that there may be something more which is affecting the fundamentals. The US inventory numbers have come out a bit on the short side, which is helping the bullish case on oil.

The stockpiles have dropped 3.89 barrels to 312.7 million. We haven’t seen a number like this since October of 2005. This is below the Energy Information Administration’s projection of a 0.4 million barrel addition. Refinery activity also declined, from 87.1% to 86.2%. Again, this is below expectations.

Overall this gives us inventory levels that are 7.5% lower YoY
Below is a graph illustrating YoY changes in % of crude inventories for the last 3 years. As you can see, there’s a steady decline.

The decline in stockpiles will be of definite interest as demand continues to climb. Payroll numbers are indicating that the US economy is still strong, which means we should not expect a slow down in industrial activity – the kind of activity which uses oil. This means that demand can be consistent with where it’s been in the past but will be paired with a shrinking available supply.

What OPEC Is Saying

“In spite of this, OPEC is being usually accused for oil price changes and the expectation from OPEC to increase (its oil) production is an illogical expectation.”

-Acting head of the Iranian oil ministry, Gholamhossein Nozari said news agency Shana reported Friday. He said that the world should not anticipate OPEC to increase crude oil production and said that heads of OPEC states would not confer on skyrocketing oil prices in an upcoming Riyadh summit.

The supply numbers here, are again, not exactly positive. For Non-OPEC numbers, the aggregate supply projections are expected to increase by around 0.81 mb/d over the previous year to reach 50.29 mb/d which represents a minor downward revision of 28,000 b/d compared with last month’s assessment.
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