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Page added on March 16, 2016
When Will The Oil Market Rebalance?
Some observers believe the market must rebalance before oil prices bottom.
But that is not necessarily true for futures prices, which are based on price expectations.
Projections show the world rebalancing in the second half of 2017.
At that point, oil inventories will be much higher, and oil companies will draw them down if prices rise much.
The projection of the U.S. alone coming into balance in a few months seems illogical.
Two key issues for oil market investors and traders are whether the market has bottomed and when the market will rebalance. By rebalance, I mean supply and demand are roughly equal such that there are only seasonal stock builds and draws. For reasons discussed in my recent article, I think there is reason to believe that the market has bottomed, although I would not rule out a “test” of the lows.
Some analysts seem to believe the market has to rebalance before prices can bottom. But that view is not correct. Futures prices are the market’s probability-weighted assessment of future price scenarios. They take into account the potential for lower-price scenarios as well as the potential for higher-price scenarios. In addition, crude futures prices are structurally underpriced to provide a risk premium to buyers (read why here).
My view is that the oil producers have found a way to have effectively taken out the low-price scenarios through their “freeze” talk. All they have to do is make announcements, and the market jumps. This is very dangerous for short-sellers. There are limits to bluffing, but it reduces the aggressiveness of hedge fund shorts.
World Rebalance
In the International Energy Agency’s latest Oil Market Report, it stated that, “we cannot be precisely sure when in 2017 the oil market will achieve the much-desired balance.” Using estimates from the most recent Short-Term Energy Outlook published by the Energy Information Agency (EIA), they project that OECD inventories will peak in August 2017 at 3.332 billion barrels.
24 Comments on "When Will The Oil Market Rebalance?"
paulo1 on Wed, 16th Mar 2016 9:58 am
Now who on earth would be short seller in the energy market? I don’t hang out with people who have death wishes. In a market so rigged, a recent chief player just committed suicide as prosecution and jail appeared imminent for rigging leases (market). And that’s just one example. Doubtless, there are hundreds. It can be dangerous to swim with the sharks. They eat investors for lunch.
Apneaman on Wed, 16th Mar 2016 11:44 am
What is the definition of “balanced”?
When was it defined?
Where can I find it?
How did it come about?
How long has it been defined as such?
Is the definition universal?
If it needs rebalancing, then when was the last time it was balanced?
shortonoil on Wed, 16th Mar 2016 12:23 pm
Another commentator who appears to be unaware that it is energy that ultimately controls the price, and availability of oil. Perhaps they are unaware of why oil is used?
When the point was reached where the energy to produce a unit of petroleum and its products became greater than the energy delivered to the end consumer it was no longer possible for that consumer to acquire all of the oil produced. That occurred in 2012. Excess inventory has now become a permanent condition for the industry. Downward pressure on price will continue until producers can no longer turn a positive cash flow.. At that point they will cease production, and the oil age will have ended.
The EIA is not looking forward to a time when inventories will start to contract:
http://www.eia.gov/forecasts/steo/report/global_oil.cfm
They are correct in that regard.
http://www.thehillsgroup.org/
joe on Wed, 16th Mar 2016 12:34 pm
Inventories are artifical creations, nations are adding capacity to store oil in their own versions of cushing thus nations buy more oil than they need, so glut is the future, then all you have to do is make sure you keep the oil nations as enemies and throw in tight production and you are set.
Its a strategic position, but it will not last.
rockman on Wed, 16th Mar 2016 1:01 pm
A – I had the same question but then he defines it: “By rebalance, I mean supply and demand are roughly equal such that there are only seasonal stock builds and draws.” Thus when more oil is going into storage then “normal” the market is out of balance. Which is fine except it ignores the reason (s) more oil is going into short term storage. We know that much of the oil that has gone into storage is not oil belonging to producers but production that has been bought by folks speculating on making money due to the contango dynamics. But that oil being bought is part of the consumption whether it’s refined or stored: in either case it’s being bought. That oil is being stored as a primary part of the demand dynamic: those speculators are demanding that production. IOW much of the oil going into storage is a result of INCREASED DEMAND…not a decrease. If the contango prospect of making a profit buying and reselling oil had not developed then there would have been much less demand for oil purchase from the producers.
So here’s a question for him: if the contango dynamic were to disappear tomorrow with no expectation of it returning anytime soon would the speculators continue to lose money paying for storage? I would imagine many if not most would begin liquidating those holdings. Which would be EXCESS stock drawdowns which would meet his definition of an unbalanced market. And this isn’t a theoretical possibility: this happened between late 2013 and at the end of 2014 when CUSHING STORAGE LEVELS FELL 60%. So by his definition the market was unbalanced during that period since we had withdrawls way beyond normal. But from mid-2012 to early 2013 we saw Cushing storage levels increase about 60% so again an unbalanced market. But since that unbalanced market we just experienced by the end of 2014 we’ve seen Cushing levels increase more than 100%. So unbalanced again. But if we go back to 2011 to 2012 we saw the level decrease 25%. So another rather unbalanced period of time.
I stopped checking Cushing storage in 2011. So here’s the observation: by his definition the oil market has been unbalanced continuously for at least the last 5 years. Unless you count half of 2013 when storage held around 50 million bbls and the market was balanced. But then there was also little change in withdrawals or builds during mid 2014 when levels held at 20 million bbls. So again by his definition the market was just as balanced when there was 20 million bbls being held as when there were 50 million bbls being held at Cushing.
Now let’s look at US production during these apparently unbalanced times. From 2011 thru 2012 US oil production was essentially flat. But we had an unbalanced market because we had that abnormal 25% withdrawal. But then from late 2012 into 2014 we had big increase in US production from around 5.5 mm bopd to almost 8 mm bopd. But it was during that same period we had two unbalanced periods: one due to abnormal withdrawal and one due to an abnormal build.
Thus based upon this FACTUAL DATA I really have no idea of what point he’s trying to make. If a “balanced market” is defined by one that does not experience abnormal builds or withdrawls then it would appear that in recent times the market has never been balanced and the prospect of seeing a balanced market anytime soon seems unlikely: if oil prices increase sufficiently we’ll probably see a huge withdrawal indicating that we are going through a very unbalanced period which has seen both a huge build up and withdrawal.
It’s easy to declare a market “balanced” or “unbalanced”. Rather more difficult to put actual numbers up that explain that position.
geopressure on Wed, 16th Mar 2016 1:41 pm
FED did not raise interest rates… Oil is headed back to $60/BBL (Slowly)…
Boat on Wed, 16th Mar 2016 3:47 pm
geopressure,
Oil prices going up to $60 And sustaining. My guess would be no. Why do you thinkk yes?
Boat on Wed, 16th Mar 2016 4:16 pm
short,
” Excess inventory has now become a permanent condition for the industry. Downward pressure on price will continue until producers can no longer turn a positive cash flow.. At that point they will cease production, and the oil age will have ended”.
I am proud as an American to believe in diversity of opinion. I am also proud to believe in competition of thought. When oil prices go back up along with supply and demand at new record highs I will be here at PO looking at another oil peak. Still wondering how so many were bat shyt crazy.
shortonoil on Wed, 16th Mar 2016 4:30 pm
“When oil prices go back up along with supply and demand at new record highs…”
Inventories have now grown for the longest duration in the 147 year history of the industry. The price has fallen by the most it has ever fallen over that same 147 year period.
The Etp Model projected these events long before they began.
You are either completely out of touch with reality, or in complete denial. Possibly both –
http://www.thehillsgroup.org/
geopressure on Wed, 16th Mar 2016 5:00 pm
Why do I think that oil is going back up?
Because they should have never fallen if not for manipulation… Take a look at this chart:
http://finviz.com/futures_charts.ashx?t=CL&p=m1
Are the members of this board familiar with a ‘flag pattern’ or a ‘pennant’??? Well, when applied to the linked chart, it means that all of the crude oil market analysts & futures traders did not foresee the inventory build in 2014 ahead of time…
The Oil that created the imbalance did not come from real production, it came from storage… It was a fake oil glut… & now that storage is empty…
Prices are going back up… they should go up to $120 or more, but the same geopolitical forces that manufactured the fake oil glut will hold the price advancement at $60/BBL…
geopressure on Wed, 16th Mar 2016 5:36 pm
Short: “Inventories have now grown for the longest duration in the 147 year history of the industry. The price has fallen by the most it has ever fallen over that same 147 year period.”
& this happened at a time when Iraq, Iran & Libya were are exporting practically nothing (in 2014) & while US & Asian demand were exploding to the upside…
It does not pass the smell test…
The inventory builds were fictitious…
shortonoil on Wed, 16th Mar 2016 6:53 pm
?”& this happened at a time when Iraq, Iran & Libya were are exporting practically nothing (in 2014) & while US & Asian demand were exploding to the upside…
The inventory builds were fictitious…”
You believe the reports that Iraq, Iran, and Libya were exporting practically nothing, but the reports on inventory are fictitious?
Cherry pick your data enough, and you can prove anything. That’s how pigs got a reputation for flying at supersonic speeds. The researcher just threw out all the data he didn’t like!
Davy on Wed, 16th Mar 2016 7:57 pm
“Houston’s $3 Billion of Debt Cut by Moody’s After Oil-Price Drop”
http://www.bloomberg.com/news/articles/2016-03-16/houston-s-3-billion-of-debt-cut-by-moody-s-after-oil-price-drop
rockman on Wed, 16th Mar 2016 8:31 pm
Excess storage has now become a permanent condition in the industry??? And that claim made less then 3 years after a Cushing was drawn down 60% in less then 18 months. And the apparent assumption that the current huge build in Cushing won’t be drawn down if prices rise sufficiently allowing the speculators to cash in on their contango investment.
Time will tell. I can’t pull the Cushing storage link up on my tablet but it’s easy to find. Take a look at just the last 5 years and see if anything looks remotely like a “permanent” trend. LOL.
makati1 on Wed, 16th Mar 2016 9:10 pm
Writing for a paycheck…
sidzepp on Wed, 16th Mar 2016 10:01 pm
Russia announces Syrian pull back, oil prices starting to rise. Is their a correlation here?
makati1 on Wed, 16th Mar 2016 10:08 pm
I thought Russia was supposed to be isolated?
http://thebricspost.com/indian-firms-set-to-acquire-49-9-stake-in-russias-vankor-oil-field/#.VuofSubIoUc
And the BRICS moves on…
Davy on Thu, 17th Mar 2016 5:45 am
“Oil Investors See $7.4 Billion Vanish as Dividends Are Targeted”
http://www.bloomberg.com/news/articles/2016-03-17/oil-investors-see-7-4-billion-vanish-as-dividends-are-targeted
“Bludgeoned by falling energy prices, at least a dozen oil and natural gas companies have opted to cut dividends this year to preserve cash, cannibalizing payouts considered sacrosanct by many investors. The cost to shareholders: more than $7.4 billion in lost income, compared to what they would have received this year if the payouts remained the same. It’s another painful measure — along with tens of thousands of layoffs and more than $100 billion in canceled investments — of the toll taken on the industry by the worst oil and gas price slump in decades. The quarterly payments, prized by conservative shareholders as a source of steady income, are unlikely to be restored any time soon.”
shortonoil on Thu, 17th Mar 2016 7:39 am
OECD Commercial Crude Oil and Other Liquids Inventory Days of Supply
http://www.eia.gov/forecasts/steo/report/global_oil.cfm
There has been no 60% decrease in world inventories over the last 5 years, and the EIA’s projections out to 2019 sees no decline occurring.
The industry’s revenue stream has been reduced by $2.3 trillion per year since the price decline began in 2014. Another 3 years, and most of it will be bankrupt.
geopressure on Thu, 17th Mar 2016 11:02 am
Back above $40/BBL & headed North…
geopressure on Thu, 17th Mar 2016 11:20 am
$40/BBL is the magic number that the CIA told Obama to keep the price of oil below…
Apneaman on Thu, 17th Mar 2016 12:05 pm
above $40/BBL. Is that “good for the economy?”. I just can’t keep up with the econ 101 moving goal posts anymore. When I was young cheap energy was good and too much debt was bad, but now……………………………………….
geopressure on Thu, 17th Mar 2016 1:02 pm
The Government forced the price of oil down below $40/BBL because that is where Russia has to start selling off State Assets…
However, the US is out of bullets now & can’t hold it down any longer…
They are expanding the size of the SPR so that when they do this again, they will have more bullets…
shortonoil on Thu, 17th Mar 2016 3:21 pm
“The Government forced the price of oil down below $40/BBL because that is where Russia has to start selling off State Assets…”
The price of oil went down because US inventories went 173 mb over their five year average. It is as simple as that, no spooks in black hats needed.
The price has gone up a little because of a gigantic short squeeze obviously perpetrated by someone. Many market makers are accusing the banks that are holding 100s of $billions of defaulting energy loans. The claim is that it will help zombie producers sell equity that can be used to pay back the banks. Of course, we all know that a bank with $billions at stake would never do such a thing! It’s illegal, and banks are terrified of the Justice Department. Look at all the years in prison that bank CEOs spent as a result of their complicity in the MBS fiasco???
Overall the price of oil responses to the economy. The economy is not doing any better than it was before the fall in price; actually it has been getting continually worse. Oil is not going back up to $60 until there is an economy to buy $60 oil, and DC did not send out messages to the industry to go broke.
Get a grip; or at least make a new tin foil hat. Yours is getting shabby!