OECD’s crude oil inventories dropped 2.07 percent in June from the previous month and 2.36 percent on a YoY basis. OECD industrial crude oil stocks were listed at 989.6 million barrels (mmbbls) at the end of June 2013. This was still above the historical average of 925 mmbbls over the past twenty years. However, inventories dropped below 1 billion barrels for the first time since March 2013.

OECD crude oil inventories

The first breach of this average was seen in May 1998 when crude oil inventories jumped 14 percent in one month to touch 1,008 mmbbls. December 1999 saw the return to normal for OECD crude oil inventories as they receded back below 900 mmbbls.

It wasn’t until February 2005 that we saw stocks jump above 900 mmbbls again and stay above this level. After this time, there have only been cyclic drops in inventory levels but it has mostly stayed above the mark of 900 mmbbls.

Figure 1: Historical OECD Industrial Crude Oil Stocks (mmbbls)

Historical OECD Industrial Crude Oil Stocks
Source: Energy Information Administration (EIA)

Decline in oil inventories

The reasons for the recent drop in inventories can be partly due to constrained supplies as a result of unrest in the Middle East, and partly due to the uncertainty over the economic future of Europe. However, increasing supply and low demand have kept inventories above the historical average since the end of 2008. ‘This situation is likely to persist, limiting potential increases in crude oil prices, absent further quantitative easing or Middle East unrest,” says Bloomberg.

While the crude oil inventories dropped in OECD nations, oil product inventories declined 0.97 percent YoY in June 2013. Oil product inventories closed at 2.66 billion barrels at the end of the second quarter of 2013, 26 mmbbls below the levels at the end of second quarter of 2012.

Oil product stocks saw a spike after the second quarter of 2008 and have remained above the historical average of 2.594 billion bbls since then.

Figure 2: OECD Oil Product Industry Stocks

 OECD Oil Product Industry Stocks
Source: Energy Information Administration (EIA)

Due to the increase in demand over time, the inventory level at any point in time alone is not an adequate measure of the ability of the developed nations’ sustainability in case of an emergency. Hence, we must look at the measure of days of forward demand that the current inventories can cater to.

Figure 3: Days of Forward Demand of oil inventories

Days of Forward Demand of oil inventories
Source: Energy Information Administration (EIA)

Oil stocks and demands

After adjustment for demand, stocks were at 59 days of forward demand at the end of the second quarter of 2013. This was an increase of 1 day over the previous quarter and the same as at the end of second quarter of 2012.

The historical average for this measure holds at 56.90 days and the current inventory levels are 2.1 days above the historical level. However, during the early nineties, this measure was a lot higher as can be seen in the above graph. During the early nineties, with political unrest threatening global oil supplies, the developed nations maintained their oil stocks at above 60 days of demand.

The Arab spring is creating unease among strategic planners. People are pulling money out of emerging markets and countries are considering stocking up on necessities. While current developed nation oil product inventories are sufficient considering historical levels, the tension in the Middle East may drive up prices and make supplies tight.