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Oil Falls As OPEC Euphoria Abates

Oil prices fell for the…

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Oil Prices Responding Positively To Bad News, But Why?

Oil Prices Responding Positively To Bad News, But Why?

Lately, oil prices have gone up when they should have gone down. Last week, OPEC decided not to cut production and the two major energy agencies released reports that the world over-supply problem is getting worse. Brent oil price increased from $62 to $65. Bad is the new good.

The expected bad news on Friday, June 5 that OPEC would not cut production was skillfully cloaked in positive statements about growing demand. On Monday, June 8, Brent opened at $62.69 and rose to $65.70 over the next two days

On Tuesday, June 10, the EIA published its monthly Short-Term Energy Outlook (STEO) that showed that the production surplus responsible for low oil prices had increased in May to almost 3 million barrels per day (bpd).

WorldLiquidsProductionSurplusDeficit

Figure 1. World liquids production surplus or deficit and Brent crude oil price. Source: EIA and Labyrinth Consulting Services, Inc.

(Click image to enlarge) Related: Canadian Economy More Damaged By Oil Prices Than Expected

Production fell by 106,000 bpd but consumption fell more by 156,000 bpd (Figure 2). Oil prices rose $2.19 per barrel based on that good news.

WorldLiquidsProductionConsumptionBrent

Figure 2. World liquids production, consumption and Brent crude oil price. Source: EIA and Labyrinth Consulting Services, Inc.

(Click image to enlarge)

On Thursday, June 11, the IEA came out with its Oil Market Report. The message was the same. The production surplus for the first quarter of 2015 was the highest in a decade at 1.85 million bpd and, obviously, the highest since the oil price crisis began in June of last year (Figure 3). Related: The Front-Runners In Fusion Energy

WorldLiquidsProductionSurplusDeficit

Figure 3. World liquids production surplus or deficit. Source: IEA and Labyrinth Consulting Services, Inc.

(Click image to enlarge)

The oil-price crisis occurred because supply (production) exceeded demand (consumption) beginning in the first quarter of 2014 (Figure 4). That situation has persisted. First quarter 2015 supply was about the same as fourth quarter 2014 but demand was lower, not a good thing.

IEAQuarterlyLiquidsSupplyAndDemand

Figure 4. IEA quarterly liquids supply and demand. Source: IEA and Labyrinth Consulting Services, Inc.

(Click image to enlarge) Related: New Silk Road Could Open Up Massive Investment Opportunities

There is optimism about demand but what is that based on? It’s based on increased vehicle miles travelled in the United States. I agree that is a good sign but the U.S. is not the entire world.

There is optimism about decreased U.S. rig counts but U.S. production has increased. The EIA estimates that tight oil production will decline by 91,000 bopd in July but that is more than balanced by new lower Tertiary production in the Gulf of Mexico.

There is optimism because there have been inventory withdrawals in the U.S. but those always occur at this time of year.

I agree with all of this optimism but it is basically well-informed sentiment. The hard data is that we have a production surplus in the world that is getting worse, not better.

Markets don’t always behave rationally. Oil prices do not always reflect fundamentals like supply and demand. Over time, however, markets come into balance with fundamentals. Right now, oil prices are profoundly out of balance with fundamentals. Look for a correction.

By Art Berman for Oilprice.com

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  • alex_80 on June 12 2015 said:
    "Look for a correction"
    May be. But it is also possible that it was getting too low in panic. Then we are in the correction mode on the way to real price now. Nobody knows.
  • Lee James on June 12 2015 said:
    Great snapshot of where U.S. production stands relative to demand. The petroleum industry is trying to build optimism and hold on to investors. Sounds like production will continue on the high side for awhile as "someone else" cuts production.

    But will the growth of U.S. demand continue slower, despite lower gasoline prices for consumers? We know petroleum production will eventually adjust -- but to what level of demand? What will fossil fuel demand look like in 2015? The world is starting to slow down the burning -- and not just just because economic activity is down.
  • Brad on June 13 2015 said:
    Markets have never worked on a direct correlation between demand and supply, and this disfunction is increasing. Look at it more like a bungee cord connection with a lot of whiplash and various oscillation happening. If you have an investment in it that depends on that direct correlation you will be eaten.
  • pascia on June 14 2015 said:
    What has been developing in the oil market has already been priced in long before the crash. The oil market nowadays is a forward looking specie. The great deal of pundits showing nightmare in the market are vague whistle-blowers. The main themes now probably are China, oil drillers debt financing and USD. The world economy is in a self-curing phase amid capital excesses. That means low commodity prices, low margins, destruction of capital (may be Schumeter's creative destruction.
  • John Brown on June 25 2015 said:
    Oil has gone up despite what is a huge surplus because everybody wants it to go up, and everybody involved will twist the news anyway that gives them a reason to bid up the price despite the glut. Eventually the glut of oil will be too much and the price will start dropping. Right now their is no reason the price shouldn't be $30 a barrel, or even lower based on supply, but the everyone involved in the industry and speculators hate the idea so much they are keeping the price up. After all how long can you keep a fleet of giant tankers sitting out in the ocean acting as storage for millions of barrels of oil, and there is more supply soon coming online. The longer the price is artificially held up the bigger the crash when it comes. Right now we're working our way toward sub $20 oil.
  • Rushabh Shah on June 28 2015 said:
    Mr. Berman why are you throwing away all of your hard work and good analysis just because of some silly EIA figures which are overestimating current production? You know the EIA is incompetent in forecasting long term production so what makes you think they can accurately forecast short term rapid changes, especially with something as different from conventional oil as tight oil? The recent data out of North Dakota and Texas show production peaked in December. It has been declining since and will only accelerate as the market has been fed all this misinformation from the EIA. This perceived oil glut will actually result in significantly higher oil prices because production has actually been declining rapidly, future production projects have been put off, and consumption has increased due to the lower oil prices. This triple whammy will cause the market to go from one extreme of lower oil prices to much higher oil prices because the shale oilfields will not easily be able to ramp up there oil production do to the momentum of the rapid decline curves. You once said "Shale oil is not a Revolution it's a retirement party." Well more like a Retirement party with an incredibly nasty hangover..... I look forward to your revised commentary.

    Here is an article by Ron Patterson showing the production declines

    http://oilprice.com/Energy/Crude-Oil/Texas-Production-Down-Gas-Takes-Biggest-Hit.html

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