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Arthur Berman

Arthur Berman

Arthur E. Berman is a petroleum geologist with 36 years of oil and gas industry experience. He is an expert on U.S. shale plays and…

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Data Suggests An Oil Price Recovery Could Be Sooner Rather Than Later

Data Suggests An Oil Price Recovery Could Be Sooner Rather Than Later

World oil demand increased by 1.1 million barrels per day in February.

This is a potentially important data point that suggests a crude oil price recovery sooner than later. It is also important because it further supports the view that a production surplus and not weak demand is the main cause for the recent oil-price fall.

The latest data from EIA shows that February world liquids production was flat with January but consumption increased 1.1 million barrels per day. This reduces the relative production surplus (production minus consumption) from 1.68 million barrels per day in January to 0.56 million barrels in February. The chart below shows production (supply) in blue and consumption (demand) in red.

WorldLiquidsProduction

World liquids production, consumption and Brent crude oil price. Source: EIA.
(click image to enlarge)

The gap between production and consumption shrunk to its lowest level since April 2014, before the drop in world oil prices as shown in the chart below. Related: The Truth About U.S. Crude Storage

WorldLiquidsProductionSurplus

World liquids production surplus or deficit and Brent crude oil price. Source: EIA.

(click image to enlarge)

The EIA forecasts that consumption will be lower in the next 3 months before returning to and exceeding the February demand level in June and thereafter for the rest of 2015 as shown in the chart below. IEA data released today is somewhat less optimistic indicating lower demand through the second quarter of 2015 with higher demand in the second half of the year. Related: Why Oil’s Recent Drop Indicates Strength, Not Weakness

EIA2015

EIA 2015 World Liquids Production and Consumption Forecast. Source: EIA.

(click image to enlarge)

I have written before that oil prices will not rebound based on sentiment that rig counts are falling in the U.S., and that something tangible is needed for a durable price recovery. This new demand data may form the foundation for a stable price recovery although weaker demand in coming months might work in the opposite direction. In today’s Oil Market Monthly Report, IEA calls the recent stabilization in Brent prices a “head fake.”

Another tangible signal for higher prices is found in a robust increase in U.S. vehicle miles travelled (VMT). The U.S. Federal Highway Administration released December data this week showing a new monthly record for VMT although per capita driving has not returned to pre-financial crisis levels. Related: Big Changes Needed For Big Oil To Survive

U.SVehicleMilesTraveled

U.S. vehicle miles traveled. Source: J. M. Bodell, Aperio Energy Research.
(click image to enlarge)

The demand information released this week by EIA and IEA do not indicate that oil prices have reached a bottom. They do offer the first tangible signal that lower fuel prices are causing a surge in consumption. This is an important component for price recovery.

Production, however, is the larger problem for prices. While February production did not increase, a meaningful price recovery must be founded on a decrease in production that is repeated over several months.

By Art Berman for Oilprice.com

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  • gregory on March 13 2015 said:
    what a stupid statement ,the price was bought down by less demand, consumers not being able to afford $100 barrel oil, $3.65 gasoline,$3.69 heating oil, $4.25 ng, $.025 a kwh electric bills , high food prices, crap jobs, and low and stagnant wages. The only reason prices might rise is if oil companies cut back production and will store oil then claim demand is up. That's when Americans can start to screwed again with their own natural resources, after all isn't that whats called energy independence?
  • Tom Smith on March 13 2015 said:
    Here is a novel idea...federal government could impose a nationwide speed limit allowance of 5mph over signage on roads over 40 mph. Then tell refiners that are currently earning huge profits that if national average gas price increases more than 5 percent the allowance will be removed. This would keep prices down while increasing demand and save oil industry jobs. Also...the people who complain about higher usage could just choose not to drive faster. This would immediately increase demand for gas and diesel while still improving economy with lower prices. In the meantime work on imposing a system where we use our own oil first before importing foreign oil.
  • Mick on March 14 2015 said:
    Just another sad, pathetic attempt to convince bulls a recovery is around the corner. No clue what's actually driving the price, as usual for bulls. Here's a hint, oil has only been $100 for about 5-6 years, so the assumption that "Oil has always been $100" is laughable.

    Oil has done nothing more than revert to its mean, just pull up a long term chart for proof. So sad people can't figure this out, so sad, so bad.
  • Amvet on March 15 2015 said:
    The EIA revises the production-consumption data by large amounts. Some of the changes were more than 1 million bpd. Any idea about how accurate the EIA data is?
    If it is 5% wrong, predictions are meaningless.
  • Gib brown on March 23 2015 said:
    Regarding these comments.....Americans do NOT collectively own these resources, individuals do. Further, if it were possible to ''screw" the American consumer with high prices, why the periodic need for price crashes? Unless, of course, free markets have something to do with the price swings.
  • Richard on April 15 2015 said:
    Historical data over the last 5 years shows the oil price generally steady just above 80 USD per barrel with an uncharacteristic slide down to less than 50 at the end of last year. It has to be expected now and again and I guess just over 80 USD is where it should ultimately recover to.

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