Even if Saudi Arabia wins its struggle with U.S. shale producers over market share, it will face a new billion-barrel adversary.
Natural gas prices may plunge below $1 on ‘insane’ storage glut not seen in 18 years
A lukewarm winter and record gas storage are conspiring to create Canadian gas prices down, and the like affordable prices could force wellhead shut-ins
Read on
It won’t be regional nemesis Iran, a resurgent Iraq or long-standing competitor Russia. The answer could be more prosaic: Even when overproduction ends, a stockpile surplus in excess of 1 billion barrels built up since 2014 will stay, weighing on prices. Inventories could keep accumulating ’till the end of 2017, the International Energy Agency forecasts, and clearing the glut could take years.
“We might arrive at the end of the year, and even though demand and supply are in balance, the market shrugs and says ‘What exactly?’ because it’s waiting for evidence of inventory draw-downs,” said Mike Wittner, head of oil markets at Societe Generale SA in Ny. “Moving from stock-builds to balance may not be enough.”
Since it was unveiled in late 2014, Saudi Arabia’s strategy to bring the world’s oversupplied oil markets back into balance by squeezing competitors with affordable prices has proved gruelling, dragging crude down to under US$30 a barrel recently. While a gentle decline in U.S. production signals supply will stop growing, the second act of the process may prove the longest as stockpiles slowly contract.
For a historical precedent, Goldman Sachs Group Inc. points to the oil glut that coded in 1998 to 1999 as demand plunged within the wake from the Asian economic crisis. Crude prices kept falling even while the Organization of Petroleum Exporting Countries made output cuts in March and then June of 1998, slipping below US$10 a barrel in London in December of this year. It wasn’t until stockpiles in developed economies started looking at early 1999 that the recovery took shape.
Related
- How the West was done: Plummeting oil prices and political change conspire to stall Canada’s growth engineAubrey McClendon dies at 56: Former Chesapeake CEO was a mythical character who pioneered the shale revolution
-
-
-
Between late 2014, when developed-world stockpiles were at about average levels, and the end of the year, global inventories may have swelled by about 1.1 billion barrels, IEA data shows. Another 37 million will be added in 2017. Using the agency’s projections based on how quickly inventories will fall, and estimates from Energy Aspects Ltd. that 290 million barrels will flow into China’s strategic reserves, it will take until 2021 to clear what’s accumulated.
The latest data from the American Petroleum Institute show the build-up in the U.S. is just getting bigger, using the nation’s crude stockpiles ballooning by 9.9 million barrels a week ago. West Texas Intermediate crude futures fell 2 percent to $33.70 a barrel a 10:07 a.m. London time.
“For that previous eight quarters for this one, we have had global implied stock-builds, so we have accumulated lots of oil,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London. “It’s likely to take a lot of time to sort out that excess oil in the system.”
Missing barrels
Inventories could erode as soon as come july 1st since the decline in U.S. shale output will probably be steeper than is widely assumed, based on Vienna-based consultants JBC Energy GmbH, which predicts prices could rebound to US$50 a barrel in June. A lot of the extra the IEA estimates accumulated in the fourth quarter of 2015 hasn’t actually appeared kept in storage, suggesting the excess has a smaller footprint than thought, Standard Chartered PLC says.
“The most likely explanation for the majority of the missing barrels is simply that they don’t exist” and are the “result of underestimation of demand and overestimation of supply,” said Paul Horsnell, head of commodities research at Standard Chartered. “They imply that the worldwide market will swing back to deficit prior to consensus.”
Saudi Arabia repeated last week that it won’t accelerate the re-balancing process by reduction of its very own supply. As the kingdom and some other OPEC members have agreed with Russia to freeze output at January levels, a co-ordinated cut is “not happening,” Saudi Oil Minister Ali al-Naimi said at the IHS CERAWeek conference in Houston on Feb. 23.
Inventories started to swell in 2014 because the wave of supply unleashed through the U.S. shale oil boom, along with other new output, outpaced growth in global oil demand with a factor of three. The pile-up continued in 2015 as OPEC members like Saudi Arabia and Iraq raised production to defend their share of world markets. Tanks are poised to fill much more as Iran – freed by recently from international sanctions – pushes new exports right into a market that’s already saturated.
The time that it will take to use up what’s relaxing in tanks around the world contributes to Goldman Sachs’s confidence in its prediction, right now an oil-industry mantra, that prices will remain “lower for longer.”
“The marketplace have a hard time trading higher once demand and supply shift right into a deficit as the inventory overhang will probably act as a drag until stock levels are normalized,” said Jeff Currie, head of commodities research at Goldman Sachs in Ny.
Bloomberg News
