(flickr: Sergio Russo

The Oil Glut Is Alive And Well

September 13th, 2016 by

oil-glutOil traders and energy companies are reeling from news that the global oil glut will last longer than previously thought. A one-two punch of increasing non-OPEC supply, combined with slowing demand in Asia, has economists rethinking the sunny forecasts they were issuing only last week. This leads to the question:

How much longer will the global oil glut last? Is it possible to predict the oil market at all?

New Global Oil Glut Forecasts

On Monday, an OPEC report revised the cartel’s estimate of non-OPEC supply higher for both 2016 and 2017. OPEC had predicted at the start of the year that the global oil glut would be over by now. A report Tuesday by the International Energy Agency pegged global oil demand as growing slower than forecast last month, and oil output falling less than expected. The IEA now marks June 2017 as the month when the billions of barrels of crude stockpiles will begin to fall.

August OPEC Report

OPEC meeting in Vienna, Austria

Photo: Day Donaldson

OPEC’s August market report sees global oil demand growing by 1.23 million barrels a day in 2016 to 94.27 million barrels a day. Non-OPEC oil production is revised downward by 610,000 barrels to 56.32 million barrels/day, while OPEC production (using August’s figures) would be 33.24 million barrels/day. Adding OPEC NGLs* (6.29 million barrels/day) gives a total production of 95.85 million barrels a day, for a surplus of 1.58 million barrels a day going into global stockpiles. (MOMR September 2016,Table 10.1)

Global oil demand for 2017 is forecast by OPEC to increase by 1.15 million barrels to 95.42 million barrels a day. Non-OPEC production of 56.52 million barrels, plus OPEC production of 33.25 million barrels, plus OPEC NGLs of 6.43 million barrels gives an average oversupply of 780,000 barrels a day for the world next year. Nearly half of this year’s over-production, but still adding over 3/4 of a million barrels a day to global oil stockpiles.

The major contributors for the increased non-OPEC crude supply are US shale production that has not fallen as fast as expected, and a huge new offshore oilfield in Kazakhstan that will begin operations next month.

The report sees non-OPEC production in 2017 as growing by 200,000 barrels a day, instead of the previously estimated 150,000-barrel loss. Nearly all of this increase will be from the Kashagan oilfield in Kazakhstan, which will produce 360,000 barrels of oil a day once it begins production in October. Kashagan’s output over the 4th quarter is expected to boost the average non-OPEC crude production for the second half of 2016 by 180,000 barrels a day.

The Home Team

Saudi Oil productionOPEC member states produced 33.24 million barrels of oil a day in August, 23,000 barrels less than July. Taking that as the average for the year and comparing to the world demand for OPEC oil of 31.7 million barrels a day shows an additional 1.54 million barrels a day being added to the global oil glut.

The oil cartel has had to drastically revise its projected demand numbers for 2017. The estimate of a global demand for OPEC oil of 32.48 million barrels a day is 530,000 barrels a day below last month’s forecast. OPEC production is projected to hold steady, at 33.24 million barrels a day. That drops the daily oversupply to 760,000 barrels, increasing the global oil glut.

International Energy Agency

The International Energy Agency’s report this week also reflects the effects of a stubborn US shale sector. Their prediction earlier in the year that the oil market would be in equilibrium by the end of 2016 was pushed out to June 2017, due to slower projected demand growth.

The IEA reported global oil demand for 2015 at 94.7 million barrels a day. Demand for 2016 is expected to climb by only 1.3 million barrels to 96 million barrels a day. Global demand next year is expected to be only 1.2 million barrels higher than 2016.

oil glutThe report notes that while global oil demand increased by 1.4 million barrels a day in the first quarter of 2016, that growth fell to only 800,000 barrels in the second quarter. The slowdown in growth is in large part due to falling demand in Asia. China has nearly filled its crude reserves to capacity at these cheap prices, and is cutting back on oil imports.

2015 saw 1.7 million barrels of oil added to the global oil glut every day. In July 2016, global oil stockpiles grew by 32.5 million barrels to over 3.1 billion barrels — a level never seen before. The agency notes that any reduction in oil supply from US fracking businesses have been more than made up by higher production from OPEC.

The IEA directly addresses our question in the closing paragraph of this month’s Oil Market Report:

“When will the world oil market return to balance? That is the big question today. With the price of oil at current levels, one would expect supply to contract and demand to grow strongly. However, the opposite now seems to be happening. Demand growth is slowing and supply is rising. Consequently, stocks of oil in OECD countries are swelling to levels never seen before.”

 

 

*NGL = Natural Gas Liquids. Included in the non-OPEC production, but broken out in the OPEC numbers.

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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