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LONDON: Global petroleum inventories are the tightest for years in a sign the market is overheating, as the global economy recovers rapidly from the coronavirus pandemic and major oil producers refuse to increase output faster.

Commercial inventories held in the countries of the Organisation for Economic Co-operation and Development (OECD) totalled 2.68 billion barrels at the end of December 2021, down from 3.21 billion in July 2020.

Since peaking after the first wave of coronavirus infections in 2020, inventories have fallen at the fastest rate for decades, and ended last year at the lowest seasonal level since 2013.

OECD commercial inventories ended December roughly 8% below the previous five-year seasonal average, with or without the pandemic year, based on data from the U.S. Energy Information Administration (EIA).

There is no precedent for such rapid depletion of stocks in recent decades and the EIA estimates stocks have fallen further in January and February (“Short-term energy outlook”, EIA, Feb. 8).

The result has been a surge in both nearby oil futures prices and calendar spreads, reflecting concerns about the availability of sufficient oil. Front-month Brent futures prices have climbed roughly 25% in the last two months, as the latest wave of coronavirus infections has ebbed and had limited impact on global economic growth or oil consumption.

Brent’s six-month calendar spread, which is closely correlated with stock levels, has surged into a backwardation of more than $8 per barrel this week, within the 99th percentile for all trading days since 1990.

The current combination of rapidly escalating front-month futures prices and backwardation is the most bullish since at least 1993 (


Low and falling inventories are a sign of excess demand and inadequate supply, putting continuous upward pressure on prices.

On the demand side, global economic growth has remained faster than expected, despite repeated waves of infections and lingering restrictions on business activity and international passenger aviation.

Consumer and business spending remains focused on manufactured items, which are much more oil-intensive to produce and transport, rather than in-person services, where infection risks are higher. On the supply side, Saudi Arabia and other countries in the expanded OPEC+ group of major oil exporters have refused to boost output faster, despite pressure from consumer-country governments.

Rejecting calls to make more barrels available, OPEC+ has repeatedly cited the downside risk to prices from a slowdown in consumption growth as a result of a new wave of infections.

But while the infection waves have occurred, the slowdown in consumption growth has failed to materialise, leaving the market chronically undersupplied and ratcheting prices higher.

Outside the Middle East, many members of OPEC+ in Africa, Latin America and Eurasia are struggling to increase output after decades of underinvestment, mismanagement, corruption and civil unrest.

In addition to the problems experienced by other members, Iran and Venezuela are under sanctions imposed by the United States, crippling their ability to increase production and exports.

Like OPEC+ countries, U.S. shale producers have resisted calls to increase output, recycling revenues from higher prices to their shareholders in the form of higher dividends and share buybacks.

Into this already tight market, the confrontation between Russia and NATO over Ukraine has added concerns about a potential disruption of Russia’s oil exports, which would deplete stocks even further.


Continued depletion of petroleum inventories is clearly unsustainable and will have to be arrested in the near future by faster increases in production, slower increases in consumption, or both.

Faster production increases could come from U.S. shale producers; OPEC+ members in the Middle East; or easing U.S. sanctions on Iran and Venezuela.

Slower consumption growth could come from the effects of higher oil prices restraining demand; a spontaneous slowdown in the business cycle; the impact of higher U.S. interest rates; or a cyclical slowdown in China.

None of these scenarios would be comfortable for policymakers and oil industry leaders, but at least some of them will have to materialise to stabilise and rebuild inventory levels.


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