Analysts at Goldman Sachs have noted that Saudi Arabia has increased its crude oil inventories by 34.5 million barrels in the three-month period from December 2011 to February 2012. Goldman views the increase as a hedge against a “substantial” domestic rise in demand that the Kingdom cannot meet by “simply raising production levels.”
The Saudis burn crude to generate electricity. Between April and September of last year, the country burned an average of 660,000 barrels/day to provide about 65% of its domestic electricity supply. A fair portion of that goes to run the desalination plants the Saudis use to provide the Kingdom with fresh water.
Coupled with the swelling Saudi inventories is the news out earlier this week from Bloomberg that Iran is holding some 33 million barrels that it can’t sell due to US-led sanctions in floating storage. That’s a total of 67.5 million barrels of crude that is already out of the ground and just sitting around doing nothing. The US has 373 million barrels in its commercial inventories as well, and total global inventories were put at 2.63 billion barrels by the IEA in its April report.
With stockpiles this high, and with draws on these stocks at a third of usual levels, the currently backwardated market (current spot prices are higher than future prices) could be setting up for a correction. A lot depends on the situation in Iran, of course. A closure of the Strait of Hormuz will surely cause a major spike in crude prices. And maybe some of the Saudi stockpile will be used to offset the 2.2 million barrels/day that Iran provides to the global market. Who knows?
Goldman does not share the view that crude prices will fall. The firm’s analysts stick by their projection that Brent crude will average $120/barrel by the second half of 2012 and rise to $130/barrel in 2013.
Barring some unusual event, though, there are some reasons to expect crude prices right now to continue their slow decline, providing some welcome relief to high prices for gasoline.
Paul Ausick
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