U.S. MANUFACTURING production excluding volatile output of vehicles and parts was down -1.6% in April 2023 compared with April 2022. Production for the three months from February to April was down -1.5% compared with the same period a year earlier:
U.S. BUSINESSINVENTORIES remain elevated despite efforts to reduce them which implies the softness in industrial and freight activity is likely to be prolonged for several more months. Manufacturers, distributors and retailers held inventories equivalent to 1.39 months of sales in March 2023, unchanged from December 2022, and up from just 1.30 months in March 2022. Excess inventories are particularly high at distributors and retailers which will remain a drag on new orders:
¹ Like any cartel, OPEC+ uses a set of production baselines so total group supply can be adjusted in response to changes in market demand while ensuring each member retains a fair pro rata share. Like other cartels, the baselines used by OPEC+ do not necessarily correspond to shares in actual production or capacity in the real world. Cartels often find it very difficult to reach unanimous agreement to change baselines and shares. So in most cases they end up using baselines that have some historical basis but have become out of date.
Between the 1600s and 1800s, England’s Newcastle coal cartel (known as “the limitation of the vend”) allocated larger shares to some mines than they could actually supply. Some of the older, smaller or higher-cost mines had not been able to grow output fast enough to maintain their traditional market shares. But it was easier to keep the baselines and adjust allocations up and down in line with changing market demand than to renegotiate them. OPEC+ has often faced the same problem.
For both the Newcastle coal cartel and OPEC+, total allocations were often above total supply, ensuring changes in notional allocations were normally greater than changes in actual production.
OPEC+ frames its decisions in terms of adjustments to total and individual allocations, not production. The actual change in production is often different. In this case, many OPEC+ countries have been unable to utilise their allocations fully because they have insufficient capacity. These members will not be required to reduce their actual production since it was already well under quota. The actual fall in production is therefore likely to be much smaller than the reduction in the notional allocations.
The difference between production and notional allocations has been a persistent problem in the oil market. OPEC+ decisions are usually reported as “changes in production” when they should be reported as “changes in allocations”. It may seem a harmless simplification but it is deeply misleading.
Sometimes, however, the misdirection is intentional. It allows OPEC+ to announce a large headline increase or decrease, and use it to generate a desired market or diplomatic reaction, even though the actual change in production is much smaller.
But it is more technically accurate and analytically useful to report OPEC+ decisions in terms of production allocations and then report changes in actual production separately.
U.S. PETROLEUM INVENTORIES fell by -16 million bbl in the week to September 30. There were reductions in crude (-8 million), gasoline (-5 million), distillate fuel oil (-3 million) and jet fuel (-1 million). Total inventories have depleted by -480 million bbl since the start of July 2020 and are now at the lowest seasonal level since 2004:
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