Cross-Posted: Inventories and the Price of Oil

Gregor Macdonald
January 7th, 2010

For a lengthy discussion on inventories and the price of oil, subscribers might be interested in today’s post at Gregor.us: Inventories and the Price of Oil.

A snippet: Over the past decade two blindspots have consistently marked popular oil price forecasts, of the kind you see each day on TV. First, there is the ongoing misunderstanding about inventory measurement as an absolute number, rather than on a days supply basis. I would agree that at the extremes, when oil inventories are very high or very low, it does make sense to consider the absolute measure. But outside of these extremes, relative inventory on a days supply basis is a much stronger price determinant because the oil price will guide itself on a 6 month basis towards those conditions. Most of the oil price forecasts and analysis you hear on TV is about the 30 day market, which has as its only focus the price needed to clear smaller changes in under or oversupply on a local basis.

-Gregor