The Long Road to Rebalancing | Russell T. Rudy Energy LLC
“Oil Voice” recently featured an article by Art Berman entitled “OPEC Production Cuts and The Long Road to Market Balance”. Berman makes a convincing case for how far the international oil market is from equilibrium.
Thus far, OPEC and its collaborators have been surprisingly conscientious in adhering to production quotas and have removed approximately 1.8 million barrels of oil per day (bopd) from the market since last November. Saudi Arabia has borne the brunt of these cutbacks, reducing output by 619,000 bopd, 35% of the total. The Desert Kingdom, along with the other members of the Gulf States Cooperation Council has, in the aggregate, cut production by 1.159 million bopd, or 65% of the total. Iraq and Russia have contributed 12% of the total reduction and Mexico 9%.
Nigeria, Iran and Libya were exempt from quotas. Nigeria’s production dropped anyway, but not intentionally, and Libya and Iran have increased.
The good news is that the net effect of all of this is that oil inventories in the OECD (Organization for Economic Cooperation and Development, i.e. the most developed nations in the world) have dropped by 107 million barrels since the middle of last year. The bad news is that inventories must decrease by another 260 million barrels to get down to the average of the last 5 years. At that level, oil prices could theoretically recover to around $70.
The market’s immediate response to production cutbacks and inventory decreases was an increase in prices. Potential buyers thought that future prices would be higher than current prices so they bought more oil to lock in a savings. At this point two things happened; shale producers ramped up production, and inventories started to build. Both factors exerted downward pressure on prices. Then, potential buyers thought that future prices would be lower so they started drawing down inventories.
Currently the market seems susceptible to relatively minor supply shifts such as outages in Canada and shipping problems in Libya. Berman reasons that currently production and consumption are approximately equal, but cautions that this does not mean $70 oil any time soon. He makes the point that production is not the same as supply, and consumption is not the same as demand. “Demand is the quantity of oil the market is willing to buy at a certain price-it may be more or less than production.”
Oil prices crashed in 2014 because there was not enough demand at $100 per barrel to absorb an ever-increasing stream of production. Prices had to drop to $30 before demand was sufficient to ignite a limited recovery.
Berman concludes that the 5 year average inventory is a dynamic proxy for market balance, and we are still about 260 million barrels above that. He contends that it will take another 6 months to a year to get there.
To read the article, which includes some great graphs, in its entirety, please go to https://oilvoice.com/Opinion/4022/OPEC-Production-Cuts-and-The-Long-Road-To-Market-Balance?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+OilvoiceHeadlines+%28OilVoice+Headlines%29 .
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.
