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Page added on May 16, 2016

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Oil Markets Balancing Much Faster Than Thought

Oil Markets Balancing Much Faster Than Thought thumbnail

Oil markets are only a few months away from a much closer balance as demand holds steady and supply drops off. Several reports from the three major energy entities more or less say the same thing – the supply overhang that the world has experienced over the past two years should narrow and start to close in the second half of 2016.

The International Energy Agency estimates that the world is dealing with a supply surplus of 1.3 million barrels per day (mb/d) right now, which should last through the end of the second quarter. By the third and fourth quarters, however, the surplus shrinks to just 0.2 mb/d.

The IEA reiterated its forecast that demand will hold at 1.2 mb/d, and expressed a growing sense of confidence that oil markets are only a few months away from moving into balance.

Related: Oil On Track To Balance Later This Year

For its part, OPEC largely agreed in its May Oil Market Report. But OPEC also chose to focus on the slightly longer-term, citing the massive cut in capital expenditures taken over the past two years. The industry has slashed $290 billion from 2015 and 2016 spending levels so far, with more cuts expected. The spending reductions contributed to the shockingly low level of new oil discoveries last year – the industry discovered less than 3 billion barrels of new oil reserves in 2015, the lowest level in six decades. With few new discoveries, and a rising number of projects deferred, there is a very low level of new projects in the pipeline, so to speak. In other words, oil supply and demand curves are converging towards a balance, and could even cross over at some point a few years down the line as supply fails to keep up with demand.

The U.S. EIA was slightly less bullish in its latest Short Term Energy Outlook, noting that oil supplies will exceed demand by 0.2 mb/d on average through 2017. And the EIA still expects oil prices to rise to only $50 per barrel next year. Still, the trend is largely the same between most of the energy forecasters.

Related: Holding 30% Of June Brent Crude Contracts, Is Glencore Manipulating Oil Prices

The forecasts are obviously just a rough benchmark, and there is a great deal of uncertainty surrounding output levels from so many oil companies and countries around the world. For example, the IEA said that Iran has defied expectations by ramping up oil production rapidly in recent months, adding 0.6 mb/d since March, hitting their highest levels since November 2011.

But, if anything, the risk of uncertainty for these projections is more likely to be on a smaller surplus. That is to say, surprise supply disruptions are a common occurrence in the oil markets, and the past few weeks are a perfect example. Canadian wildfires knocked off more than 1.2 million barrels per day of production, a disruption that will be temporary, but ultimately could last a few weeks. Nigeria has lost roughly 0.4 to 0.5 mb/d due to a handful of attacks on oil pipelines and platforms. Shell and Chevron have shut down facilities and evacuated personnel because of attacks from the Niger Delta Avengers. Venezuela has seen production decline at least 0.1 mb/d from last year, and could fall another 0.2 mb/d at least over the course of 2016.

All of these supply disruptions come on top of the expected decline in output from around the world, especially high cost U.S. shale. U.S. oil production has fallen to 8.8 mb/d as of early May, taking the loss in U.S. oil production to about 900,000 barrels per day since April 2015.

On the bearish side of things, however, there are more than a few potential surprises. Saudi Arabia’s newly powerful Deputy Crown Prince Mohammed bin Salman said just ahead of the failed Doha talks in April that Saudi Arabia had the ability to ramp up oil production by 1 mb/d in the near-term, a threat that could push oil prices down.

Also, despite the supply disruptions and the solid declines in U.S. oil production, storage levels are still at record highs. The EIA reported a surprise drawdown in storage levels in its most recent weekly report, the first decline in several weeks. But at 540 million barrels, high oil storage levels will have to be worked through before oil prices can rise substantially.

However, in fits and starts, the necessary adjustment in oil supply and demand is well on its way.

By Nick Cunningham of Oilprice.com



30 Comments on "Oil Markets Balancing Much Faster Than Thought"

  1. makati1 on Mon, 16th May 2016 8:11 am 

    This article is a joke, right?

    Balancing? LMAO

  2. Davy on Mon, 16th May 2016 8:18 am 

    I did not read one reference to the direction of the economy in this read. That should tell you right there this is too narrow a view of future old supply and demand balance. Everything I read is telling me the economy is nearing a business cycle change. As much as some people would like to think otherwise the new normal still is subject to business cycles and probably dangerous ones since we have delayed this one 8 years.

  3. onlooker on Mon, 16th May 2016 8:52 am 

    They are balancing alright at every lower levels of both supply and demand. What is worse at less net gain for the Economy.

  4. Boat on Mon, 16th May 2016 9:17 am 

    onlooker,

    Being more efficient does lower both supply and demand. Stats are shown all the time the net gain in work from all those btu’s. Automation to windmills things are changing. Large buildings can save 100,000 to 1 million in water and energy per year with pay back time as low as 4 years.

  5. onlooker on Mon, 16th May 2016 9:20 am 

    Here is the balancing more erudite people are looking at. – What is important is the EROEI FOR oil extraction has dropped from 50:1 to 10:1 for conventional wells and to 5:1 or less for fracked wells (without including environmental costs to polluting groundwater and soil). This translates into oil that is only profitable at $50/bbl and higher while consumers are experiencing demand destruction because they cannot afford oil even at $40/bbl.

  6. Boat on Mon, 16th May 2016 9:32 am 

    mak,

    I know your challenged with numbers but the article is about right.

    He did forget to mention Canada is going back online and Iran is adding to a flooded market. 2017 is a better time frame before the balance occurs and the historical large amount of stored oil starts to be drawn down.

  7. shortonoil on Mon, 16th May 2016 9:33 am 

    “In yet another paradoxical move that will leave many scratching their heads, just days after throwing in the towel on its bullish dollar call (now that it expects far less rate hikes over the next year), Goldman moments ago announced that it is also cutting back on its longer-term oil price forecasts (which paradoxically are linked to a stronger dollar) for the coming year, as a result of a rebalancing that is taking far longer to take place than previously anticipated.”

    http://www.zerohedge.com/news/2016-05-15/goldman-cuts-2017-oil-price-forecast-due-slower-market-rebalancing

    In a world of make it up as you go, it is likely to be more about agenda, than reality.

    Now — who pays Oilprice.com’s bills?

    http://www.thehillsgroup.org/

  8. shortonoil on Mon, 16th May 2016 9:37 am 

    Out of 34 weeks there were 5 in which inventory declined. Guess you could call that rebalancing — if you are trying to sell snowballs in hell!

  9. onlooker on Mon, 16th May 2016 9:42 am 

    Efficiency is NO solution Boat. It can only do so much. Also, it is quickly offset by other economic activities. Finally, they’re is a limit to how efficient we can make any process or activity.

  10. Boat on Mon, 16th May 2016 9:48 am 

    ” This translates into oil that is only profitable at $50/bbl and higher while consumers are experiencing demand destruction because they cannot afford oil even at $40/bbl.”

    Miles driven continues to grow. Fuel oil is being replaced. Bio fuels and nat gas transportation is eating at oil demand. Yet oil consumption/demand grows over 1 mbpy. How can you call that demand destruction.

  11. dave thompson on Mon, 16th May 2016 9:55 am 

    Rebalancing is rather silly if you think about how the “invisible hand” pundits always claim that we need not worry because of the automatic self fix properties of capitalism. When the reality is that know one really knows what is going on long term or even week to week. Look no further then what Nick Cunningham is selling to see why he preports to know. What is the site “oilprice.com” but another shill of industry selling the latest bullshit to unsuspecting greedy fools and wanna be capitalists.

  12. makati1 on Mon, 16th May 2016 9:57 am 

    Boat, you do know that the “growth in demand” is caused by China filling their reserves, which is about to end? If not, you need to do some research outside the US MSM.

  13. Boat on Mon, 16th May 2016 10:10 am 

    mak,

    I have read outside msm and they report much the same numbers and their predictions are much the same. You just talk shyt and don’t track the markets and the impact of events. Your not capable of a normal conversation.

  14. GregT on Mon, 16th May 2016 10:16 am 

    “How can you call that demand destruction.”

    Global economic growth continues to stagnate Boat. Despite central bank policies, and trillions upon trillions of dollars in exponentially growing mountains of debt, our economies cannot recover from the global financial crisis resulting from too high energy costs. The fact that you continue to focus on miles driven, as opposed to economies of scale, proves once again that you do not understand the exponential function, or how fiat monetary systems work. You can continue to bury your head in the sand if you like, but that is not going to change the underlying reality of the situation one iota. How you can continue to spew such utter and complete nonsense ad nauseam, is beyond comprehension. The only logical explanation for your continued ignorance, is sheer stupidity.

  15. GregT on Mon, 16th May 2016 10:30 am 

    “Your not capable of a normal conversation.”

    And you’re not capable of conversing at the normal level of most 12 year old children.

  16. Boat on Mon, 16th May 2016 10:39 am 

    gregt,

    If it were not for immigration, GDP, population and energy use would have been dropping for over a decade.

  17. GregT on Mon, 16th May 2016 10:48 am 

    We’re all in the same boat, Boat. We have no other planet to emigrate to. As you continually so clearly point out, you are unable to see the forests through the trees.

    Simple is as simple does.

  18. Boat on Mon, 16th May 2016 12:04 pm 

    No were not all in the same boat. The US has billions in extra grain. Any country above 2.2 family units per house hold should have their food cut in 5 years. That would send a signal. Add no immigration to the mandate and politicians would be forced to talk about climate change and future declining resources.

  19. GregT on Mon, 16th May 2016 12:21 pm 

    “Add no immigration to the mandate and politicians would be forced to talk about climate change and future declining resources.”

    The US makes up around 5% of the world’s total population Boat. Insignificant in the big scheme of things. AKA; the immense forest that you are unable to comprehend, hiding in plain sight behind that infinitesimally tiny stand of saplings. We are all in the same boat, Boat. The Good Ship Planet Earth. Nowhere to run, and nowhere to hide.

  20. onlooker on Mon, 16th May 2016 12:29 pm 

    Greg, talking to Boat is like talking to a programmed robot is will only respond in the way it is programmed too. No improvising or re-examination possible.

  21. shortonoil on Mon, 16th May 2016 2:07 pm 

    While we are on the complete total nonsense agenda (Hi Boat) remember all those US Treasuries that the Saudis were holding in their SWF. Guess what – they don’t!

    http://www.zerohedge.com/news/2016-05-16/mystery-saudi-treasury-holdings-solved-us-reveals-saudi-holdings-first-time

    If the Saudis have all this money squirreled away it is likely somewhere that they are not going to be able to cash it in at anywhere near book value. Could this be why they are pumping like crazy even though their fields are nearly depleted out, and probably losing money on every barrel. Follow the money!

  22. twocats on Mon, 16th May 2016 2:32 pm 

    Bankruptcy losses have nearly surpassed last years totals (and might have just passed with breit, linn, sand etc). But bakken is still only dropping a percent or two per month. Sounds like socialized production to me. one has to wonder: where is fresh capital going to come from to explore and develop new finds?

  23. Davy on Mon, 16th May 2016 2:50 pm 

    Welcome back two cats

  24. Roger on Mon, 16th May 2016 6:30 pm 

    Demand for crude is already exceeding supply…Goldman is stating the obvious. Peak oil was in 2015. US tight oil bought us a few years; nothing more. This is obvious from the world production chart:
    http://crudeoilpeak.info/world-outside-us-and-canada-doesnt-produce-more-crude-oil-than-in-2005

    “The red horizontal line is the maximum crude oil production level in May 2005 (the Katrina year). We can see that almost all additional oil produced now above that level is US shale oil. In other words: without US shale oil (which required cheap money from quantitative easing), the world would be in a deep oil crisis.”

  25. makati1 on Tue, 17th May 2016 12:43 am 

    For your consideration, Boat:

    “China’s slowing demand for oil will lead to heightened competition for suppliers.”

    http://www.zerohedge.com/news/2016-05-16/falling-chinese-demand-could-intensify-oil-war

    $20 oil by Christmas?

  26. Davy on Tue, 17th May 2016 6:04 am 

    Economic news has been quite lately but little has changed. We see the engine of growth in the global economy, China, still mired in debt creation pressures and nonperforming loans at the same time growth is under pressure. This situation lends nothing to future support for the oil complex. China is also undertaking a move towards services as a counterweight to a decaying heavy industry sector this also spells trouble for a growing oil demand.

    “BlackRock’s Fink Expresses Concern About China’s Rising Debt”
    http://www.bloomberg.com/news/articles/2016-05-17/blackrock-s-fink-says-we-all-have-to-worry-about-china-s-debt

    “New credit in China increased a record 4.6 trillion yuan ($706 billion) in the first quarter, surpassing the level of 2009 during the depths of the global financial crisis. Total debt from companies, governments and households was 247 percent of gross domestic product last year, up from 164 percent in 2008, according to data compiled by Bloomberg. Nonperforming loans rose 9 percent to 1.39 trillion yuan in March from December, the fastest increase in three quarters, data from the China Banking Regulatory Commission showed this week.”

  27. Boat on Tue, 17th May 2016 8:30 am 

    mak,

    The cut in supply is driving prices up not down. Canada will bring that 1 mbpd back online soon. World consumption growth is still over 1 mbp. No $20 oil by Christmas. $40 maybe

  28. makati1 on Tue, 17th May 2016 8:51 am 

    Dream on Boat. Dream on.

  29. twocats on Tue, 17th May 2016 9:35 am 

    Thanks davy. Been working a lot so i only peek into the conversations occasionally. And you said it things are definitely in a steadish state. Not that things are going well – deflation is still the dominant factor. Demand is weak (ie not efficiency gains lol) across the board, Upkeep costs (economy in general) are enormous, and supply is apparently bankruptcy proof. Only when demand finally finally finally reaches supply will things get interesting again i think.

  30. Kenz300 on Wed, 18th May 2016 8:56 am 

    The transition to safer, cleaner and cheaper alternative energy sources continues…………

    Germany Achieves Milestone – Renewables Supply Nearly 100 Percent Energy for a Day

    http://www.renewableenergyworld.com/articles/2016/05/germany-achieves-milestone-renewables-supply-nearly-100-percent-energy-for-a-day.html

    Portugal ran entirely on renewable energy for 4 consecutive days last week

    http://electrek.co/2016/05/16/portugal-ran-entirely-on-renewable-energy-for-4-consecutive-days-last-week/


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