Oil futures prices (WTI) plunged 12.5 percent this week from $47.90 on Friday, November 3 to $41.96 yesterday morning, November 11. The main reason is that the global supply imbalance is getting worse.
The U.S. Energy Information Administration's (EIA) latest report indicates that the world supply surplus (production minus consumption) increased 590,000 barrels per day (bpd) compared to September to 1.58 million bpd (Figure 1).
Figure 1. World liquids production, consumption and relative surplus or deficit.
Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
Supply was flat but consumption decreased 520,000 bpd. Weaker consumption suggests weakening demand, a disturbing trend that is also evident in year-over-year consumption-change data (Figure 2). Related: OPEC Hoping Chinese, Indian Demand Can Alleviate Glut
Figure 2. World year-over-year liquids consumption change.
Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)
Only OPEC estimates global oil demand. Their Monthly Oil Market Report released today shows world oil demand growth of 1.6 million bpd so far in 2015 (Figure 3) but decreasing to 1.5 million bpd overall for the year and only 1.25 million bpd for 2016. OPEC data indicates about 1 million barrels of surplus supply relative to demand. Related: A Bit Of Good News For The Global Coal Industry At Last
Figure 3. Supply/demand growth for first three quarters 2015, mb/d. Source: OPEC November 2015 Monthly Oil Market Report.
(click image to enlarge)
The EIA also revised the decline in U.S. crude oil production to 490,000 bpd since April (Figure 4) from its estimate last month of 590,000 bpd.
Figure 4. U.S. crude oil production and forecast. Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge) Related: Railroads Hit By Falling Oil And Coal Production
The good news is that the EIA forecasts an ongoing decline in U.S. oil production of more than 1 million bpd by September 2016.
Overall, the outlook suggests a persistent market imbalance. Supply growth has stopped but remains higher than demand and the forecast is for weaker demand growth going forward. The only near-term hope for improved prices, therefore, is a decline in world production of about 1 million barrels per day. Falling U.S. production will help move fundamentals toward balance but represents too little decline over too long a period to bring price relief any time soon.
Last week, Daniel Yergin and Andy Hall predicted that oil prices had reached a bottom. I fear that their optimism is based on sentiment. Although it makes sense that lower oil prices should result in increased demand, data offers little encouragement so far.
A weak global economy that is over-loaded with debt is a powerful obstacle to oil-demand growth. Only the pain of lower prices will force global producers to reduce supply enough to create an oil-price recovery.
By Art Berman for Oilprice.com
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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
Comments
Where else can an investor find a better long-term supply/demand imbalance than this? Amazon, Facebook, or Netflix which all trade at 30+ FPE?
Does anyone really think this oversupply can last longer than another 18 months without a move back to the $60+ range.
The real question is where will equilibrium be once the hedges end and higher cost production shuts down across the world.
My thought is 70-80. It is important to note that removing 1% or 1 million barrels from the market can happen at any time if Saudi Arabia reaches the proverbial breaking point. Burning through 20% of their GDP means they have 5 years max before they go deeply into the red.
SA will blink.
In the past, if SA reduced its production, I don't think there was nobody out there like the US who could and would instantly ramp up production in response.
If SA drops by 1m, how long until the US ramps up by at least half that in response? Months? Then they're back where they started.