Friday, August 28, 2015

The Continuing Problem with Oil Inventories

Updated November 2015

A recent "Today in Energy" posting by the U.S. Energy Information Administration very succinctly explains the reason why oil prices have dropped over the past year and why it is unlikely that the oil market fundamentals will change any time soon.  

Here is a graphic showing global inventory levels for oil and petroleum liquids in millions of barrels per day since January 2008 along with the price of Brent crude:

As you can see on the dark brown bars, oil inventory has been steadily positive since August 2014.  This tells us that global production of both oil and hydrocarbon liquids has outpaced the growth in consumption.  In fact, for the first seven months of 2015, total global liquids inventories have grown by an average of 2.3 million barrels per day, the highest level since 1998 when oil prices collapsed as shown on this chart:

The EIA provides the following data for 2014 and 2015:


Global petroleum liquids consumption growth: 1.2 million BOPD
Global petroleum liquids production growth: 2.3 million BOPD
Average global consumption rate: 92.4 million BOPD

2015 (to the end of July 2015)

Global petroleum liquids consumption growth: 1.2 million BOPD
Global petroleum liquids production growth: 2.9 million BOPD
Average global consumption rate: 93.3 million BOPD

Here is a graphic showing the same data along with a graphical representation of the buildup in global petroleum liquids inventory:

The sources of petroleum liquids supply have changed.  In 2014,  global liquids production growth was from countries outside of OPEC, including the United States, with OPEC production levels actually dropping.  In 2015, increased production levels of petroleum liquids has come from both OPEC nations (up 0.9 million BOPD in 2015) and non-OPEC nations (up 2.0 million BOPD in 2015).

Since global liquids inventories started to build in August 2014, there has been a significant change in   the difference between futures prices and near-term petroleum liquids contracts, increasing from nearly zero in 2014 to between $5 and $10 per barrel.  This reflects the increased cost of growing storage needs and the increased supply of oil.

In the coming months, the EIA expects that crude oil production in the United States will begin to drop as companies respond to lower oil prices and reduce drilling levels.  The latest EIA data shows that U.S. crude oil production has actually risen from 8.7 million BOPD in 2014 to 9.3 million BOPD in 2015 but will drop to 8.8 million BOPD in 2016.  Estimates this that U.S. production averaged 9.4 million BOPD for the first eight months of 2015, actually rising by 100,000 BOPD than the average production rate during the fourth quarter of 2014 despite the fact that the U.S. oil-directed rig count has declined by 60 percent on a year-over-year basis.  This will have an impact on the global level of inventory accumulation which is expected to slow from its current level of 2.0 million BOPD to 1.5 million BOPD in Q4 2015 and to below 1.0 million BOPD in 2016.  That said, the EIA forecasts that Brent crude prices will average only $54 per barrel in 2015 and $59 per barrel in 2016 with the price for West Texas Intermediate averaging about $5 less per barrel than Brent crude.

This data suggests that the oil industry is unlikely to see a quick turnaround, particularly if the global economy continues to show signs of slowing.  While the growth rate in petroleum liquids storage will slow over 2015 - 2016, inventories will continue to accumulate, particularly if Iran adds additional supply.  This suggests that the global oil market could be in for a repetition of what happened in 1998 and that there will be continued downward pressure on prices, at least over the medium-term.

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