Why Stocks are Important

According to the Energy Intelligence Group’s 1997 report, "How Much Oil Inventory is Enough?," there are 7-8 billion barrels of oil tied up worldwide in industry and government stocks (inventories) at any given time.  (The estimate excludes consumer stocks.)  Why so much?  Mostly, because stocks are needed to keep the global supply system operating.  They can be thought of as a huge pipeline stretching from the wellhead to the consumer, filling the tankers, the pipelines, the railcars, and the road tankers, and linking all the markets and all the segments of the industry together.  They are thus the key to the oil industry’s proven ability to deliver the right product to the right location at the right time.

Only around 10 percent of this vast stockpile is typically available to the industry to use as and when it pleases.  Although minor in volume terms, these stocks -- sometimes described as "discretionary" -- can affect the industry in major ways, because this subset of total stocks indicates whether markets have too little, too much, or just the right amount of oil.  Thus, when stocks are low in a particular market, prices there are likely to be relatively high, encouraging extra supply or reducing demand.  Vice versa, when a region's stocks are high, prices are likely to be relatively low in that market.  For example, if distillate is in short supply on the U.S. East Coast so that distillate stocks there are low, then the price for East Coast distillate rises relative to distillate prices in other markets, like Europe; relative to other products, like gasoline; and also relative to crude oil.   Stocks, particularly projected stocks, are thus viewed as a leading indicator of prices and are one of the most closely watched aspects of the oil market.

It is hard for the industry to follow global stocks as closely as it would like, because the data have large gaps.  The United States is the only country to publish comprehensive weekly stock data.  The data’s uniqueness and timeliness make them market movers, albeit temporary ones, nearly every week, in spite of the fact that they provide only a snapshot, based on preliminary information.

The United States, with its huge and widely dispersed oil market, has by far the largest commercial stocks, some one billion barrels.  The Gulf Coast holds the greatest part of the crude oil stocks, but the East Coast, with its high consumption and limited local supply, has the greatest finished product inventories.

Most of the world’s storage capacity is owned by the companies that produce, refine, or market the oil.  There is also a small but important proportion that is owned by independent operators, who make their living by renting it to third parties. These facilities are located predominantly at the world’s main trading hubs, like Rotterdam, Singapore, New York Harbor, and the Caribbean, and are an important element in making those hubs successful and viable.  The volumes in independent storage can be a key indicator of what is happening to discretionary stocks.  These data are, therefore, also greatly sought after by the industry but if they are outside the United States often lie outside the more formal data collection systems. 

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