How to Measure
The Oil Uncertainty Problem

Oil has become one of the most widely traded commodities in the world, but despite our ability to connect producers with consumers across vast distances, we don’t have a great handle on exactly how much is in the system, and especially on how much is being stored. The WSJ explains the problem, and describes why it’s getting worse:

Some countries, such as Russia and China, choose not to report their oil-storage levels. And traders and oil companies that park supertankers have no obligation to make public their supply. This makes for more cryptic and volatile oil markets. How much crude is in these locations, and how quickly it can be resold into the market, can affect oil prices.

“The data itself is so inconsistent,” said Harish Sundaresh, portfolio manager and commodities strategist for Loomis, Sayles & Co., which manages $240 billion. “In countries like Nigeria, Brazil, Angola, it’s not trustable.”

Keeping track of inventories has become more complicated as developing countries store and consume more oil.

These uncertainties are understandably problematic for oil traders, and they can also make life more difficult for oil companies trying to draft market strategies—if the exact amount of crude sloshing around the global market can’t ever be precisely known, decisions based on the delicate balance of supply and demand are going to carry with them some significant risks.

This is especially difficult for OPEC, which in the face of the latest oil price collapse has all but collapsed into irrelevancy, choosing to wait out the bearish market and compete for market share. The petrostate cabal briefly mulled a coordinated production freeze with Russia and a handful of other non-OPEC producers, but at the time we pointed out that such an agreement would be very difficult to monitor, given the “fuzziness” of production and storage data.

The precise amount of oil in storage may be difficult to nail down, but approximations can still help us understand what’s going on in the industry today: American shale built up the global glut that led to the 2014-2016 price crash, and while bargain prices temporarily slowed the U.S. boom down, shale companies look to be on the cusp of a production rebound.

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