Excess Oil: where is it coming from and where is it going?

In July 2014, crude oil prices topped out at the $110+ per barrel mark. Fast forward just 10 months to April 2015, and we find production from OPEC, Russia and the US at all-time highs. As a result, a dramatic and rapid drop in oil prices has ensued, with the markets currently caught in what they like to call “Contango”, meaning futures prices are higher than on-the-day purchases.

Here is a snapshot of how things currently stand:

Demand
Both the IEA (International Energy Agency) and OPEC (Organisation of the Petroleum Exporting Countries), in their April 2015, market updates have revised worldwide demand for crude oil for the rest of the year. The revision showed a slight increase of around 1mbbl per day, taking total worldwide demand for the black stuff to a shade over 93.6mbbl/d.

In reality, demand is pretty flat year-on-year, around 1%. Increased demand is welcomed and assisted by good recovery signs in the Americas and Europe, but is offset by a reduction in consumption in the Asia Pacific region: Japan is notably down 2.8% year-on-year, as it switches to more natural gas usage.

Supply
After years of high oil prices and cheap debt, large production expansion projects have become a reality --none more so than that which has caused the US to almost double its daily production volumes in the last 10 years, and pump more crude than they have done in over 40 years, due to fracking.

Despite the embargo on the export of crude oil from the US, it has single-handedly put the preverbal monkey wrench in the works of the world’s oil powers. Ok, the US has never played backseat when it has come to the affairs of world oil, however, as a consumer as opposed to as a producer, this time it’s different.

With OPEC and Russia scrambling to protect market share and assert their global dominance, in the face of a US that is heading towards energy independence, their decision was not just to continue but to increase production quotas.

The result of Russia, OPEC and the US not stemming supply? Crude prices more than halving in less than 12 months, to bottom out at around $48 per bbl.

Although this price dump has cleared out some of the highly-leveraged and debt-laden fracking companies, as well as the more speculative drilling sites, a return to a more expected range of $65-$80 per bbl will allow this wave of currently stalled and idle fracking companies back into the mix, thus repeating the process of oversupply. What we could see as a result is a possible yo-yo effect: as prices rise, production rises, causing prices to fall (assuming demand stays the same, of course).

Both Iraq and Iran are also threatening to cause further supply gluts.  Both are planning to ramp up exports over the coming year. Iraqi/Kurdish exports are now topping over 3m bbl/day with most of the new production being exported through the pipeline in the north to Turkey.

Meanwhile, Iran is looking to capitalise on ongoing relationship-building with the West in return for the lifting of sanctions. If this were to happen, Tehran has committed to increasing exports of both oil and gas. The question is: as Iran is 4th in world oil reserves and 2nd in gas, how quickly and by how much are they planning to increase by?

As world demand remains sluggish and prices already unstable amid a wash of crude, what would this do to the price on the world stage? Answers on a postcard...

Stockpiles
Worldwide crude stockpiles continue to increase, although with US refineries now coming off planned maintenance and an increase in demand for gasoline, diesel and jet fuel for the summer, expectations are a slow but steady decline in stockpiles over the next few months if prices remain at current levels.

Chinese stockpiles are due an increase in Q2, due to Asian refinery planned shutdowns. When at its peak in May, they will have 2.5mbbl/d offline, while OECD stockpiles have declined in Q1 this year to 34mbbl.

Overview
With the best analysts in the world trying to figure out what will be next in the "Global Oil Saga", one thing remains clear: no one has called it right so far. With fragile recovering economies, reduced growth from emerging markets, continued unrest in several Middle Eastern countries, and the potential to add hundreds of thousands of barrels per day in extra capacity from numerous individual sources, the future is very much unclear.

Source: https://www.iea.org/oilmarketreport/omrpublic/currentreport/#Highlights

Photo: By Skitterphoto, via Pixabay, CC0 License