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Hot Money’s Pushing Oil to $70, but OPEC Should Keep Cool

Brent crude touched $70 a barrel on Thursday, a level it last saw three years ago. That might start to look like a level where OPEC could say that its work to rebalance the market is done.

Crude Rally

Brent crude has been rising since Saudi Arabia began to cut its oil sales to the U.S.

Source: Bloomberg

After all, its output deal has done a pretty good job of draining surplus inventories. And U.S. oil stockpiles, including crude, refined products and the oil stored in the Strategic Petroleum Reserve, have fallen by around 147 million barrels in the past 12 months and now stand just 23 million barrels above their five-year average, according to weekly government data.

Draining Away

The total U.S. oil stockpile is approaching its 5-year average level after six months of draws

Source: Energy Information Administration

But there is more to the run-up in oil prices than the drop in American stockpiles. And OPEC should should think very carefully before changing its strategy.

Inventory levels outside the U.S. are far more opaque. While the U.S. provides comprehensive data weekly, the Paris-based International Energy Agency only assesses OECD stockpiles with a 2-month time lag — so the latest results are for the end of October. They also show excess stockpiles coming down since the middle of 2017. But they also show the rising five-year average, the baseline for measuring excess crude, is having a much bigger impact on the amount of excess crude in storage than is the case in the U.S. That suggests inventories are still too high.

Closing the Gap

The decline in excess OECD stockpiles owes more to a rising baseline than to falling inventories

Source: Bloomberg, IEA

That is true whether you look at the absolute volumes of stockpiles, or the number of days of demand…

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