High US oil stockspile can buffer supply threats

US oil inventories at their highest for seven years worry Opec producers crude prices then were about quarter of today's levels but now they reflect supply worries and higher demand more than an unwanted glut, analysts say.

Tight spare production capacity globally means that refiners cannot rely on Opec to compensate for a major supply disruption and have had to boost stocks to lower potential exposure.

Any board member of a major oil company exercising fiduciary responsibility has got to be voting for carrying higher inventories, says Adam Sieminski, chief energy economist for Deutsche Bank in New York.

The last time US stocks were as high as today the price of oil stood at $16-$18 a barrel. US crude was at $68.38 a barrel on Friday. But back in 1999, US demand was over 1.6 million barrels per day less than it is now.

Inventories in the US, the world's top oil consumer, are also an anomaly compared to global crude and refined oil product stocks, Kevin Norrish of Barclays Capital said.

A heavy round of US refinery maintenance has contributed to the stock build and that should begin to clear up as plants restart and need more crude, he said.

Elsewhere stocks are lower. In Japan they hit a 33-year low in January although they have since recovered a little.

Around 51 days of forward demand was covered by stocks in OECD countries in January, the International Energy Agency said last week. That was unchanged from a year ago.

Norrish said the overall picture is that OECD inventory levels are a little bit above normal but not massively so Norrish said. US crude stocks are very much an anomaly.

In a bid to bring down prices, the Organisation of Petroleum Exporting Countries has left its output unchanged around 25-year highs, even though supplies were expected to be well above demand in the second quarter. That should lead to more stock builds.

Kuwaiti Oil Minister Shaikh Ahmad Al Fahd Al Sabah has said that the group was working to bring the US oil price below $60, although other Opec ministers have been more vague about where they want prices.

Opec may knock the price below $60 this year, but it will be more because high prices are eating away at demand than as a result of the group's output policy, analysts say.

Sieminski says he thinks Opec has a chance of success. But it will be in the second half of the year if he sees another couple of months of lower demand expectations and as long as there isn't a loss of supply.

The International Energy Agency cut its 2006 demand growth forecast this week by 290,000 barrels per day (bpd), but it still expects strong growth of 1.49 million bpd.

In 2005 global consumption rose just over a million barrels.

Demand in the US and China shows little sign of slowing.

Non-Opec provides about 60 per cent of the world's supply, but last year struggled to compensate for lost output in the US Gulf due to hurricanes and declining flows from mature fields in the North Sea.

As non-Opec faltered, Opec had to step in to plug the gap. Both Sieminski and Norrish said that non-Opec output may again come in below expectations this year.

There has been poor performance so far this year in the North Sea says Norrish. The US certainly is not coming back as quickly as people thought it would and Russia has been very, very poor, partly down to the cold weather.

Opec may be comfortable with the $58-$64 range that prices have been trading at in the past month, Norrish said.

Norrish says That is pretty much what they are content with and certainly marks a step up in the rather inexplicit price ranges that they occasionally signal to the market.