• 3 minutes Shale Oil Fiasco
  • 7 minutes "Leaked" request by some Democrats that they were asking Nancy to coordinate censure instead of impeachment.
  • 12 minutes Trump's China Strategy: Death By a Thousand Paper Cuts
  • 16 minutes Global Debt Worries. How Will This End?
  • 1 hour americavchina.com (otherwise known as OilPrice).
  • 4 hours Forget The Hype, Aramco Shares May be Valued At Zero Next Year
  • 2 mins Democrats through impeachment process helped Trump go out of China deal conundrum. Now Trump can safely postpone deal till after November 2020 elections
  • 2 days Wallstreet's "acid test" for Democrat Presidential candidate to receive their financial support . . . Support "Carried Interest"
  • 19 hours Natural Gas
  • 2 days Everything you think you know about economics is WRONG!
  • 10 hours Joe Biden, his son Hunter Biden, Ukraine Oil & Gas exploration company Burisma, and 2020 U.S. election shenanigans
  • 5 hours POTUS Trump signs the HK Bill
  • 58 mins READ: New Record Conoco Eagleford Vintage 5 wells, their 5th generation test wells . . . Shale going bust . . . LAUGHABLE
  • 52 mins Iraq war and Possible Lies
  • 1 day 2nd Annual Great Oil Price Prediction Challenge of 2019
  • 1 day Winter Storms Hitting Continental US
  • 24 hours Aramco Raises $25.6B in World's Biggest IPO
  • 15 hours My interview on PDVSA Petrocaribe and corruption
Alt Text

What’s Behind The Bounce In Oil Prices?

Oil prices saw some significant…

Alt Text

Two Factors To Upend Oil Markets In 2020

While most analysts continue to…

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…

More Info

Premium Content

Oil Is Set To Rise, But The Rally May Not Last

The United States is no longer over-supplied with oil. That sounds like good news. The bad news is that it may signal lower oil prices going forward.

An unexpected 9 million barrel (mmb) crude oil withdrawal from storage this week moved comparative inventory (C.I.) below the 5-year average. That shifted C.I. to into negative territory at -5 mmb for the first time since September 2018.

The bad news is that it crossed the 5-year average at about $55/ barrel. That crossing point is called the mid-cycle price, the clearing price of the marginal barrel needed to maintain adequate supply through the current supply-demand cycle (Figure 1).

(Click to enlarge)

Figure 1. Comparative inventory road map. Mid-cycle price is the clearing price of the marginal barrel needed to maintain adequate supply through the current supply-demand cycle. Source: Aperio Energy Research

Figure 2 shows the real-world comparative inventory-WTI price cross-plot for 2014 through the present. C.I. reached a minimum in May 2018 (red dot on far left of figure) after progressing along the July 2017-2019 yield curve (blue).

(Click to enlarge)

Figure 2. WTI comparative inventory is in projected deficit for March. Source: EIA and Labyrinth Consulting Services, Inc. – Aperio Energy Research

C.I. increased along the black arrow at ~$70 prices through October 2018 (second red dot). These prices were inflated above the yield curve by market sentiment about the effect of U.S. sanctions on Iran for oil supply. Related: One Last Warning For The U.S. Shale Patch

Once those fears were relieved, price moved downward along the next black arrow to the December monthly average price of $50. This move was in response to growing market sentiment that the world was over-supplied with oil.

Since December, prices increased back toward the yield curve along the third black arrow through February. Large inventory withdrawals over the last two weeks have moved the projected March C.I. vs price data point to the left of the y-axis, the C.I. 5-year average.

That crossing point or mid-cycle price was approximately $55/barrel which is about $7 lower than the previous $62 mid-cycle crossing point in March 2018. More data is needed to fully evaluate the stability of this C.I.-price trend and its implications for oil prices going forward.

Many analysts and market observers believe that oil prices will move much higher with OPEC+ production cuts, declining U.S. inventories and a relatively strong global economy assuming that U.S.-China trade talks have a happy ending. I agree with them but C.I. yield curve data suggests that prices may disappoint the oil bulls.

The slope of the July 2017 through 2019 yield curve is flatter than the previous 2014 through June 2017 curve. That indicates that markets feel less urgency about future supply and that price response to falling C.I. will be somewhat subdued. The latest data suggests that the trend may be even flatter and lower than previously imagined.

I have no doubt that WTI prices will move higher in coming weeks and possibly months. It is reasonable that sentiment may take prices back to the $70 range. Sentiment-based price excursions are part of the C.I. model.

When WTI prices were in the $70s last September and October, I angered price bulls by suggesting that trend would probably not last. I am again urging caution based on the data.

By Art Berman for Oilprice.com

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage



Leave a comment
  • prasad naga on March 21 2019 said:
    what a beautiful crisp and clear explanation about crude oil is very nice.i never seen an analyst given an explanation in this perspective till now,well done sir.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play