Chronic Oversupply | Russell T. Rudy Energy LLC
A recent article in “World Oil” contends that Saudi Arabia’s real enemies are not U. S. shale producers, surging Iraqi production levels, arch-nemesis Iran, or Russia. Rather, it is a global oil glut of over 1 billion barrels which has been accumulating since 2014. This inventory of oil will keep accumulating until the end of 2017 according to the International Energy Agency (IEA), and take years thereafter to work off.
Mike Wittner with Societe Generale SA in New York notes that even if current production and demand are in synch by the end of this year, this supply overhang could pre-empt any oil price recovery. While many industry observers anticipate domestic oil production gradually declining this year, this might not be enough to begin the process of inventory reduction and consequent price increases.
In 1998 the Asian financial crisis caused global demand and prices to fall and inventories to rise. OPEC cut output to no avail. It was not until inventories started falling in early 1999 that prices began to recover. If one assumes that IEA estimates are correct, world-wide stocks will increase to 1.1 billion barrels by the end of this year, and another 37 million barrels in 2017. This could mean oversupply until 2021.
Domestically, the same thing is happening. According to the American Petroleum Institute, domestic inventories are growing at almost 1 million barrels a week. However, Vienna based consulting firm, JBC Energy GmbH, predicts that U. S. shale production will drop more sharply than generally anticipated, leading to a price increase to $50 per barrel by June of this year. This view seems corroborated by Standard Chartered Plc.’s contention that IEA inventory estimates are overstated.
Nevertheless, the U. S. shale revolution led to swelling crude inventories. This, in conjunction with other sources of new production, resulted in global supply outpacing demand by a factor of three with the excess going into inventory. Things only got worse when Saudi Arabia increased production to preserve market share and Iranian sanctions were removed.
All of this seems to reinforce Goldman Sachs’ prediction that prices will remain “lower for longer”. As Jeff Currie, the head of commodities research at the investment bank opines, “The market will have a hard time trading higher once supply and demand shift into a deficit as the inventory overhang will likely act as a drag until stock levels are normalized.”
To read the article in its entirety, please go to http://www.worldoil.com/news/2016/3/2/saudi-arabia-faces-new-oil-titan-if-it-wins-shale-battle .
Russell T. Rudy Energy, LLC buys oil, gas and mineral interests nationwide. Please call (800-880-0940), or write (info@rudyenergy.com ) to let us know if you agree, disagree or would just like to comment on this, or any of our posts.
