Fourth Quarter Shortage? | Russell T. Rudy Energy LLC
In spite of a wealth of evidence to the contrary, some industry observers are predicting that the world oil market will shift from surplus to shortage by the end of this year. “Rigzone” reports that Standard Chartered Bank foresees this shift despite a current glut of 2 million barrels of oil per day (bopd). Apparently, they are not alone in this view as investment firm Sanford C. Bernstein Ltd. predicts demand outpacing supply by 1.5 million bopd by the fourth quarter of 2015.
Much of this optimism is based on the recent draw down of oil stocks in the U. S. In response to the recent price collapse, operators slashed budgets and drilling activity which is slowing the increase in domestic production. This in turn help contributed to a reduction of domestic inventories. It is true that through May 22 stocks dropped for the fourth straight week. However, this should be put in perspective: prior to these decreases, oil inventories had been at an 85 year high.
Nonetheless, Paul Horsnell with Standard Chartered Bank has observed “The start of sustained U. S. inventory declines is a significant milestone for the oil market. Virtually all the global build in commercial inventories so far in 2015 has occurred in the U. S. The end of this build is likely to be an early warning of a shift into deficit for the global market as a whole.”
Sanford C. Bernstein’s Neil Beveridge concurs. “By the second half of this year we will go from being oversupplied to being undersupplied. Once we see U. S. production growth come to an end with demand growth running at about 1.5 million barrels a day, we’ll see a significant tightening in the market.”
Not all market observers agree however. Investment bank Goldman Sachs sees any decreases in U. S. production as insufficient to reduce excessive supplies, citing a sharp growth in output from low cost suppliers (principally OPEC).
While I hope the bulls are correct, Goldman Sachs raises a good point. Also, with the fracklog (drilled but uncompleted wells in the U.S. waiting to come on stream) in the U. S., and potential increased production from Libya, Iran and Iraq hitting the market, I would advise against over optimism for the short to intermediate term.
To read the article in its entirety, please go to http://www.rigzone.com/news/oil_gas/a/138824/End .
