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Will The Oil Market Stalemate Be Broken Next Month?

With momentous events unfolding on the World stage, the oil market continues to evolve at a glacial pace. Global total liquids production was 96.29 Mbpd in August, down 630,000 bpd from the June peak. But with oversupply running at over 3 Mbpd during the second quarter, there is still a long way to go to rebalance the system. Production in OPEC, Europe, Russia and East Asia is stable with no sign of turning down. In fact, Norway and the UK appear to be skipping annual maintenance this summer and European production is up 420,000 bpd compared with a year ago. The only region showing a marginal production decline is North America where production has fallen 580,000 bpd from the April peak.

I believe the stalemate will be broken in October. The oil price chart is forming a “head and shoulders” pattern, and if the price tests the recent August lows the moment of truth will arrive. Barring major events, it is difficult to imagine the price rising from here, near term. I therefore anticipate the price to break to the low side with significant losses. This is required to restore balance to the system.

  • World total liquids production down 570,000 bpd to 96.29 Mbpd.
  • OPEC production down 220,000 bpd to 31.57 Mbpd (C+C)
  • N America production down 220,000 bpd to 19.48 Mbpd.
  • Russia and FSU down 50,000 bpd to 13.88 Mbpd
  • Europe up 420,000 bpd to 3.28 Mbpd (compared with August 2014)
  • Asia up 60,000 bpd to 7.93 Mbpd.
  • Middle East rig count is stable. The international oil rig count has stopped falling while the U.S. oil rig count is showing signs of turning down again.


Figure 1 The oil price now appears to be forming a classic “head and shoulders” chart pattern. This in itself is not yet diagnostic of any future trend. To complete the pattern, the oil price needs to test the recent lows ($38.22 for WTI and $41.59 for Brent, both on August 24th). This, I expect, will happen in October. If these lows break down, it can be expected that the price will plunge much lower. If, on the other hand, the lows provide support, this should indicate that the lows are in and a price recovery may begin. Given that the gross oversupply situation persists, my expectation is for the former outcome. A total capitulation is required to rectify the oversupply status.

The July 2015 Vital Statistics are here. EIA oil price and Baker Hughes rig count charts are updated to end September 2015, the remaining oil production charts are updated to August 2015 using the IEA OMR data.


Figure 2 The bigger picture shows more clearly how the January / March lows have failed. If the recent August lows are tested and fail, the price may head much lower, to the vicinity of $20 for WTI.


Figure 3 The weak recovery in U.S. oil rig count has reversed with the total down 35 for the month. The gas rig count appears stable plotted at this scale, but the bigger picture shows that the gas rig count is on the skids and continuing to slide, currently below 200 (Figure 4). The oil rig count will need to fall a lot further to seriously dent U.S. oil production.


Figure 4 At this scale, it is clear that the gas rig count continues to slide. The oil rig count may be about to resume its slide. One cause could be drillers running out of cash.

Related: How Much Longer Can Venezuela Keep The Wolves At Bay?


Figure 5 I think it is now safe to assume that the U.S. oil production peak was in April 2015 at 13.24 Mbpd. The August figure was 12.66 Mbpd, down 580,000 bpd. In my post on U.S. Shale Oil: drilling productivity and decline rates I estimated that LTO production may fall by 830,000 bpd with current rig count and drilling efficiency. There may not be much more U.S. decline to come with the current rig count, although shutting down stripper wells will remove more oil from the U.S. market. The anticipated collapse in U.S. production may soon be over and is rather unspectacular.


Figure 6 OPEC spare capacity stands at 3.23 Mbpd and has been declining steadily in recent months. The IEA have booked 730,000 bpd spare capacity for Iran in anticipation of sanctions being lifted. And they book 1.96 Mbpd for Saudi Arabia which is likely heavy sour crude that does not currently have a refinery market. Apart from those two countries, the rest of OPEC is pumping flat out.


Figure 7 OPEC production plus spare capacity in grey. The chart conveys what OPEC could produce if all countries pumped flat out although, as stated previously, the status of Saudi spare capacity needs to be questioned. OPEC crude oil production stood at 31.57 Mbpd in August, down 220,000 bpd on July. The biggest losers are Saudi Arabia, Iraq and Angola. Production + capacity stands at 34.80 Mbpd and has bumped along this plateau since 2009.


Figure 8 Saudi production fell by 100,000 bpd to 10.30 Mbpd in August. It is too early to say if this is noise, or whether the Saudi reservoirs are struggling to maintain production. There has been no move to increase drilling. NZ = neutral zone which is neutral territory that lies between Saudi Arabia and Kuwait where production from the Wafra heavy oil field is shared equally between them. The NZ used to pump at over 500,000 bpd in 2013, but this has now effectively fallen to zero. The heavy oil in the Wafra reservoir is helped to the surface by steam injection. It seems that this is not economical sub $60.


Figure 9 The ME OPEC oil rig count is on a rising trend with operational cycles superimposed. For four months the total rig count for these four countries has been stable at 147 units.

Related: With Shell’s Failure, U.S. Arctic Drilling Is Dead


Figure 10 The slide in international oil rigs is showing signs of slowing with a reversal this month. Total international rigs are up 17 to 866. The recent peak in international oil rigs was 1080 in July 2014. The bigger picture is that the international drilling rig fleet has grown by over 400 units since 1997.


Figure 11 Russia and other FSU oil production remains rock steady, effectively glued to 14 Mbpd. Russian production was 11.02 Mbpd in August, up 20,000 bpd on a revised July figure. Other FSU was down 70,000 bpd at 2.86 Mbpd after revisions. Group production down 50,000 bpd.


Figure 12 The cycles in European production data are down to summer maintenance programs in the offshore North Sea province. To get an idea of trend it is necessary to compare production with the same month a year ago. The dashed line shows that European production has been essentially flat for three years. The post-peak declines have been arrested. Looking at the chart, it appears that Norway is skipping maintenance this year and looking at the production figures (below) it appears that the UK is also doing the same. Compared with August 2014, European production is up 420,000 bpd.

  • Norway Aug 2014 = 1.72 Mbpd; Aug 2015 = 1.88 Mbpd; up 160,000 bpd YOY
  • UK Aug 2014 = 0.58 Mbpd; Aug 2015 = 0.86 Mbpd; up 280,000 bpd YOY
  • Other Aug 2014 = 0.56 Mbpd; Aug 2015 = 0.54 Mbpd; down 20,000 bpd YOY


Figure 13 This group of South and East Asian producers has been trending sideways since 2010. The group produced 7.93 Mbpd in August, up 60,000 bpd on the revised July figure.

Related: What Oil Investors Can Learn From Gold


Figure 14 North American production looks like it has topped:


  • U.S.A July 2015 12.77 Mbpd; Aug 2015 12.66 Mbpd; down 110,000 bpd
  • Canada July 2015 4.31 Mbpd; Aug 2015 4.20 Mbpd; down 110,000 bpd
  • Mexico July 2015 2.61 Mbpd; Aug 2015 2.62 Mbpd; up 10,000 bpd

Group production down 220,000 bpd from July to 19.48 Mbpd in August. Group production down 580,000 bpd from the April peak.


Figure 15 Total liquids = crude oil + condensate + natural gas liquids + refinery gains + biofuel. August production was 96.29 Mbpd down 570,000 bpd on the revised July figure. Global total liquids is down 630,000 bpd on the June peak. Over-supply was running at over 3 Mbpd. There is still a long way to go to rebalance the system.


Figure 16 To understand this chart you need to read my earlier posts [1, 2]. The design of the chart has been modified into time slices as presented in Oil Price Crash of 2014 / 2015 Update. As suggested last month, recent price action is taking this chart down. There are growing hints that weak demand and stubborn high supply are both involved.

Other supply and demand charts will be updated next month when the third quarter data are in.


[1] Energy Matters The 2014 Oil Price Crash Explained
[2] Energy Matters Oil Price Scenarios for 2015 and 2016

By Euan Mearns

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