Global commercial oil inventories were close to their long-term seasonal average at the end of the first quarter of 2023 following massive releases from the U.S. Strategic Petroleum Reserve (SPR) over the previous 12 months.
In the countries of the Organisation for Economic Cooperation and Development (OECD), commercial stocks of crude and refined products stood at 2,804 million barrels at the end of March (“Short-Term Energy Outlook”, EIA, May 12).
Commercial petroleum inventories had increased by 200 million barrels compared with the same month a year earlier but over the same time the U.S. SPR was depleted by 195 million barrels.
By the end of March, inventories were just 15 million barrels (-0.5% or -0.09 standard deviations) below the prior 10-year seasonal average, down from a deficit of 192 million barrels (-7% or 1.10 standard deviations) a year earlier.
The progressive normalisation of inventories took the upward pressure off oil prices and calendar spreads over the past year.
Front-month Brent futures slipped to around $80 per barrel at the end of March 2023 from $108 at the end of March 2022 and a high of around $130 in May and June 2022, after adjusting for inflation.
Real prices in March 2023 were in the 40th percentile for all months since 2000, down from the 68th percentile in March 2022, and similar to March 2019 before the pandemic.
Chartbook: OECD petroleum stocks
Brent’s six-month calendar spread slipped to a backwardation of $2.50 per barrel (79th percentile), down from over $10 (98th percentile) a year earlier.
The spread is correlated with current stock levels as well as traders’ expectations about the future balance between production, consumption and inventory changes.
The rise in commercial inventories has therefore been accompanied by a weakening of the calendar spread and downward pressure on spot prices.
But downward pressure on prices and spreads would not have been possible without the massive draw down of the SPR – which is unlikely to be repeated.
More than one-third of the SPR has been depleted over the last 12 months and the remaining stock is the lowest for almost 40 years since November 1983.
For the remainder of 2023 and 2024, there is little prospect of another similar drawdown in the U.S. strategic reserve.
Prices and spreads will be much more directly responsive to the balance between the impact of OPEC⁺ restraint on production and the global business cycle on consumption.
Related columns:
- Oil market has absorbed surprise production cut by OPEC⁺ (April 26, 2023)
- Oil market has fully absorbed impact of Russia's invasion of Ukraine (March 9, 2023)
John Kemp is a Reuters market analyst. The views expressed are his own
