Oil Stockpile Buildups Add Up to Higher Prices

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For those believers in kooky conspiracies about oil prices: it may come as a real shock, but oil prices are being driven higher by real supply and demand fundamentals. Take a look at the demand side of the equation which is where oil bears, such as they who own the United States Short Oil Fund (NYSEMKT: DNO), usually point to as the main factor behind their position. 

Thanks to possible supply side shocks coming from Iran or elsewhere in the Middle East, many emerging market nations are taking the same prudent action the United States has taken for years...they are building up a strategic petroleum reserve – a fact the bears are ignoring. Many of these nations have little or no oil reserves stockpiled, in sharp contrast to the United States' strategic reserve of nearly 700 million barrels of oil. 

Even tiny Thailand, not to mention larger countries like South Africa and India, have entered the frenzy for physical oil with plans to add 20% to Thailand's stockpile of oil. This caused one oil trader to remark, “People want a stock cushion. We are putting a massive premium into immediate access to physical supplies [of oil].” 

There is great difficulty though in pinning down exactly how many barrels of oil are being stockpiled in the emerging world as such data is only published (on a delayed basis) by industrialized countries. But even in developed countries, stockpiles are beginning to be re-built to more normal levels after a long period of low inventories. In OECD countries crude oil inventories are at their lowest level since 2008 and in Europe, oil inventories are at their lowest in 15 years. 

But it is in the emerging world where the large build-up in oil inventories from practically non-existent levels that is really putting a strain on the physical oil market. As usual in the commodity markets, China is the elephant in the room. It is adding rapidly to its strategic petroleum reserve in spite of the current high prices in the physical oil market. 

Those in the oil industry believe that China has been adding between 250,000 and 500,000 barrels of oil a day to its stockpile. But no one is really sure about the actual amounts involved, Even its largest supplier, Saudi Arabia, says that all it knows is that China is buying plenty of its oil. 

China has already stored more than 100 million barrels of oil in reserve in the first phase of its strategic oil reserve program, completed in 2009. In the second phase of this plan, which is to be completed by the end of this year, China planned to add another 170 million barrels of crude oil to its strategic reserve. The third phase, to be completed by 2020, is to add at least another 200 million barrels to China's oil reserve. 

India has also started a strategic petroleum reserve, albeit on a smaller and slower scale than China. But with emerging economies growing rapidly, fueling their thirst for oil, one conclusion is inevitable. As their need for oil from the Middle East and other geopolitically unstable areas of the world grows, so does their need for building up massive oil stockpiles. 

This fact should maintain a floor under oil prices and also underpin oil bulls. Investors bullish on oil prices have several ETF choices in which to put their money including the United States Oil Fund (NYSEMKT: USO) and the United States Brent Oil Fund (NYSEMKT: BNO). Brent oil is the global benchmark for oil prices. 

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