price_vs_inventory

I annotated the graph with a few thoughts. The large cluster of data points is likely OPEC doing its part as a swing producer. Inventories drop and prices go up, a little more supply is released, inventories build and prices go down.

OPEC loses control of prices. What is odd is the build of inventory while prices are rising. If there was an expectation that prices would fall again then inventory should have remained low (the JIT line on the graph). But it didn't.

Instead refineries were willing to buy despite higher and higher prices. So I think that build was fear. Maybe that the US would attack Iran? Or they felt the world really had peaked?

Then as oil hits 80 they stopped being willing to pay and let inventory fall. So I think they are expecting that wave of oil in 2008. If it does not show up, expect another rush in price.

I think the large cluster to the left is easiest to understand driven by price. When prices dropped, traders take the opportunity to build inventories and vice versa - when prices rise traders sell into the rise and inventories fall.

There seems to be a target inventory range (that hasn't changed much with demand over time). At some point a few years ago when inventories hit the 260 mmb low point we might normally have expected OPEC to open the spigot and to see prices fall back - but on this occasion that never happened and we have the price migration from 40 to 70 $. It is curious that with rising price, inventories built back towards 350 mmb - presumably this was related to the anticipation of future prices being higher and it therefore making sense to own more oil today - a shift to contango?

The final leg of rising price and falling inventory looks like traders selling into the strong price rally - presumably with the expectation that they can refill their tanks at lower price at some future date. The $100 question - what happens next? We've just seen an uptick in demand to 86 mmbpd with record high prices.

I suspect this chart is worth keeping an eye on. If prices fall then I think we can bet on inventories rising and we head back towards $70 and 360 mmb. If prices rise then we may see another $50 sprint.

The constellation of record demand, record price and low inventories seems fairly bullish to me.