Oil stocks heading for biggest fall in ten years

Oil stocks of developed countries could be heading for the biggest fall for more than ten years, according to the International Energy Agency (IEA).

The group has criticised OPEC for curbing production and claims current stock trends and prices have meant higher exports will be needed in the months ahead.

"While total January OECD stocks remained unchanged in terms of forward demand cover, a further decline in February has lowered that buffer," said Julius Walker, IEA's oil market analyst. "Unless stocks build in March, or preliminary data is revised higher, we are on target for the strongest first quarter stock draw since 1996. At the same time, prices are higher than they have been at similar inventory levels, again indicating market tightness."

The IEA said tighter OPEC supplies and a February cold snap in the US has added to the steep decline in oil stocks and a recovery in the oil price from below US $50 in January.

"There are signs that OPEC is trying to maintain prices at the higher end of the three-year range," said Walker. "It is clear that at present we need prices higher than were seen in the 1990s to ensure that there will be enough investment to meet demand going forward, but there is little to suggest that US $60 per barrel is a true equilibrium point."

The IEA has hit out at governments in Venezuela and Russia for taking control of oilfields from foreign companies, warning greater state ownership of energy resources could stifle investment.

"All governments, OECD and non-OECD alike, tend to use higher oil prices as a pretext to shift revenue flows in their favour...but if you do not have flexibility built into the contract, you have to accept that it will be renegotiated," added Walker. "What perhaps is of more concern is where this shift takes place without negotiation. Over the longer term such moves may lead to a loss of access to capital, technology and expertise, and therefore could result in lower investment, sub-optimal reserve management and falling oil output."

The IEA also explained how political and social spending by governments has led to reduced oil and gas exports, and has criticised Russian gas firm, Gazprom for failing to invest enough of its profits in maintaining pipelines and fields. Venezuelan president Hugo Chavez, for example, has poured billions of dollars of oil revenues into social spending.

"If political and social spending of national oil company's profits is pushed too far, or if oil prices fall, it may lead to less domestic investment in exploration and development," said Walker. "This may in turn result in stagnant or declining production."

OPEC ministers met in Vienna last month to discuss oil output, concluding production was to be held steady. When asked to suggest how to solve the oil stock problem, IEA said it was virtually impossible to micro manage the market, and that the long term interests of both producers and consumers is to let the market decide.

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