Oil inventories rise for 10th time in 11 weeks, up 2.9 MM barrels; Libya's supply shock redux

Commercial oil inventories rose for the 10th time in 11 weeks, up a sizable 2.9 million barrels in the March 25 week to 355.7 million. Supply at the Cushing hub is very swollen, up nearly two million barrels to a record 41.9 million. The build in oil reflects rising imports which are at their highest level in two months, at 9.1 million barrels per day. This reference is handy as President Obama will call today for the nation to cut oil imports by one third over the next 14 years.
 
Despite the build in oil, gasoline inventories fell 2.7 million barrels to 217.0 million for the sixth straight draw. The draw reflects decreasing refinery output, at 8.7 million barrels per day for the lowest rate in nearly three months. Refineries are cutting output as gasoline demand weakens, down 0.1 percent for the first negative year-on-year reading since early February in what is tangible evidence that high gas prices are cutting back on driving. Oil prices are down 50 cents to $103.50 in early reaction to the results.  Via EIA:
This edition of This Week In Petroleum reviews the gross production impacts of three past disruptions: the Iranian revolution of 1978-1979, the Iraqi invasion of Kuwait in 1990, and the Venezuelan strike in 2002. Historically, the disrupted volumes are initially replaced mainly with the drawdown of inventories and then with increased production from other countries that have the capacity to increase output quickly. When new production arrives to help replace lost supplies, we can lose sight of the length of the loss from the disruption and subsequent events.

The Iranian revolution, which began in late 1978, resulted in an average drop of 3.9 million barrels per day (MMbbl/d) in Iran's crude oil production over the 1978 to 1981 period, with the initial supply loss reaching nearly 90 percent of total Iranian production in January 1979. However, much of this lost production was offset by increases in output from other Organization of Petroleum Exporting Countries (OPEC) members, particularly from Iran's Persian Gulf neighbors. While some of Iran's production returned within two years, Iran's production in 2010 was more than 1.5 MMbbl/d below its average level in 1977, the year before the revolution began. Similarly, when Iraq invaded Kuwait on August 2, 1990, oil supplies from these two countries were disrupted, causing a sudden crude oil price run-up. Immediately following the invasion, nearly all of Kuwait's and Iraq's oil production was taken offline. The peak lost production of about 4.3 MMbbl/d of combined Iraqi and Kuwaiti crude oil tested markets.

While Kuwait's oil wells suffered extensive damage from sabotage by retreating Iraqi forces, the country emerged from the war free of both internal discord and external interference with its recovery efforts, which began immediately following the withdrawal of Iraqi forces. That created a favorable environment for a recovery of production. Despite the significant field damage, average annual Kuwaiti oil production exceeded pre-disruption levels in less than four years. In contrast, Iraq, which has at various times over the past 20 years faced external sanctions, war, and internal strife, has not seen its production fully recover. In 2010, Iraq's production averaged 2.4 MMbbl/d, compared with 3.5 MMbbl/d, the pre-disruption 1990 monthly peak.

The December 2002 Venezuelan strike initially disrupted two-thirds of Venezuela's 3.0 MMbbl/d November 2002 production. OPEC members Saudi Arabia and Kuwait have crude oils similar in quality to the Venezuelan crude oils, and, following the strike, these countries increased production to partially offset Venezuelan losses. Within a year, Venezuelan production returned to about 85 percent of its pre-strike level. While the strike officially ended in February 2003, Venezuela's production has never returned to its pre-strike level. EIA estimates Venezuela's current production at roughly 2.1 MMbbl/d.

Past events may not be an indication of how long it will take to restore Libya's production, currently estimated to be at a near-complete shut-in. The extent and duration of Libya's supply disruption will depend on several factors. Much will depend on the political outcome and the acceptance of the government in power by both the Libyan people and the international community following the end of hostilities. Sanctions would need to be lifted to allow for international participation (both in terms of investment and trade) in Libya's oil sector. Following commercial and contractual negotiations, any infrastructure that has been damaged will have to be repaired and the knowledge base will have to return to the country before production can begin to ramp up. In light of these considerations, it is not surprising that the world crude market still reflects large uncertainties.

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