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February 17th, 2021:

Oil’s Missing-Barrel Mystery Stumps Forecasters

American Energy Coalition - February 17th, 2021

“Oil is on the move: Both Brent and West Texas Intermediate crude prices have broken the $60 a barrel mark, taking the commodity’s price back to where it was before the pandemic. But a mystery still casts a cloud over its recovery”, according to a recent article in the Wall Street Journal.

“The unsolved question has to do with what is commonly referred to as the case of missing barrels, or the amount of oil that is unaccounted for by the International Energy Agency. It is a mystery that resurfaces every couple of years, particularly when there is a shock in energy markets.”

“In the first half of 2020, for example, the IEA determined that, based on its estimate of oil supply and demand, there was a global inventory increase of 1.39 billion barrels. Out of this, it observed that roughly a quarter had gone into spare storage in countries that are part of the Organization for Economic Cooperation and Development, while 8% was in floating storage and in transit. The remaining 68% was unaccounted for.”

“There is always some oil that isn’t tracked, but the number has been growing in more recent oil-market shocks. Last year’s reached a record: The volume of missing barrels in the first half of 2020 was the largest recorded gap between observed and implied inventories since at least 1990, according to an analysis from Bassam Fattouh, Andreas Economou and Michal Meidan of the Oxford Institute for Energy Studies. In fact, it was almost 10 times as large as the imbalance seen in the second half of 2008 when the global financial crisis hit”, according to the Journal story.

“One common explanation for the discrepancy is that these barrels simply don’t exist and that it reflects imprecise measurement. Demand is observed with lags, and supply is observed imprecisely, particularly from members of the Organization of the Petroleum Exporting Countries, as the Oxford Institute report notes. “The IEA collects data from the governments. So if the government data is off, they’re off,” notes energy economist Philip Verleger. He suggests that the jump in missing barrels could be due to rather mundane reasons: More employees have been laid off or are working from home during the pandemic, which could have led to flawed data collection from primary sources. If true, it is a potentially bullish scenario for oil prices—it means there is much less crude out there than thought.”

“But the alternative explanation could lead to a very different conclusion. A substantial number of the unaccounted barrels could be stockpiled in non-OECD countries, which could mean the post-pandemic demand recovery could follow an unpredictable route. The Oxford Institute report notes that China’s imports increased substantially last year despite substantially weakened economic activity and reduced refinery runs. While this explanation has been dismissed in the past, it is becoming harder to ignore given just how much the volume of uncounted barrels has increased over the years during times of market shock”, says the WSJ article.

“Though all eyes are on China, the problem is larger than that. As the Oxford Institute report notes, the missing barrels are “related, at least in part, to the shift in global oil demand dynamics towards non-OECD and the increasing importance of Asian players particularly China where transparent, reliable and frequent data are lacking.”

“All of this is important because data from the IEA can move markets. Mr. Verleger notes that, while oil traders don’t tend to rely on IEA data, government officials still do for planning purposes, which can determine oil-production levels. Furthermore, oil traders sometimes take trading positions to take advantage of large discrepancies they see in IEA data versus their own assessment, according to Mr. Verleger. That could move prices, too.”

“Oil producers celebrating prices returning to pre-pandemic levels need to worry about what happened to all of the crude the world pumped during lockdowns.”

To read the original Wall Street Journal story, go to:

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