Crude Oil: Equilibrium With a Net

In Blog by Michael Arnold

Author: Bob Iaccino

The crude oil surplus that peaked at close to 2.3 million barrels per day (“bpd”) in 2014 and caused the 75% sell-off to the lows reached in February of 2015, is all but gone. The U.S. came close to overtaking Saudi Arabia as the world’s largest crude oil producer in 2015, averaging 9.4 million bpd in 2015 and peaking at 9.7 million bpd. Saudi Arabia and Russia were both in the 10 million bpd category but were understood to be pumping at almost full capacity while U.S production specifically; along with the overall North American production was increasing, monthly. Once the market digested how much excess supply there was, prices fell the 75% mentioned earlier and since then 77 U.S. oil companies have claimed bankruptcy according to the Wall Street Journal, while approximately 79% of U.S. oil rigs have gone offline. Prices have since risen over $20 as production tapered off.

In September of 2014, there were over 1600 oil rigs at work in the U.S. As of last week, that has fallen to a record low of 330 rigs. In the meantime, demand has increased. The growth in crude oil demand from the U.S. and China has slowed, but demand growth from other regions is increasing. Both Goldman Sachs and the Saudi minister for Energy and Industry have proclaimed the status of “surplus” in the oil markets to be over. Goldman says strong demand and sudden supply disruptions have brought the surplus to a “sudden halt” and Khalid al Falih, the aforementioned Saudi official stated the oil supply glut has vanished. “We are out of it,” he said. “The oversupply has disappeared. We just have to carry the overhang of inventory for a while until the system works it out,” he added, saying they had to wait and see how the market developed going into 2017. Saudi Arabia’s oil stocks peaked at 329.5 million barrels, but by the end of April, they had declined to 290.9 million barrels, a decline of 11.7%. Sure enough, in this week’s data, Saudi Arabia’s oil inventory fell by 38.6 million barrels.

While the possibility of slower global economic growth due to the Brexit looms (this seems unlikely in the short-term) and acknowledging higher prices causing U.S. producers to “turn wells back on” is logistically difficult at best, impossible at worst, it would seem that higher prices are coming for WTI and Brent. Short traders of oil should beware; the slippery slope of lower crude prices may not be the current normal. There is excess crude supply, but the market is more in a state of equilibrium with a safety net of maybe 300,000 to 500,000 bpd to absorb shocks such as the Alberta fires and the rebel attacks on oil fields in Nigeria. So as they say in the newly non-EU London, “mind the gap”. It may not be there much longer.

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