The Global Oil Glut Is Getting Worse, Not Better

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A weak global economy over-loaded with debt is a powerful obstacle to oil-demand growth.

By Art Berman, Oilprice.com:

Oil futures prices (WTI) plunged 12.5% this week from $47.90 on Friday, November 3 to $41.96 yesterday morning, November 11. The main reason is that the global supply imbalance is getting worse.

The U.S. Energy Information Administration’s (EIA) latest report indicates that the world supply surplus (production minus consumption) increased 590,000 barrels per day (bpd) compared to September to 1.58 million bpd (Figure 1).

Figure 1. World liquids production, consumption and relative surplus or deficit. Source: EIA, Labyrinth Consulting Services, Inc.

Supply was flat but consumption decreased 520,000 bpd. Weaker consumption suggests weakening demand, a disturbing trend that is also evident in year-over-year consumption-change data (Figure 2).

Figure 2. World year-over-year liquids consumption change. Source: EIA, Labyrinth Consulting Services, Inc.

Only OPEC estimates global oil demand. Their Monthly Oil Market Report released today shows world oil demand growth of 1.6 million bpd so far in 2015 (Figure 3) but decreasing to 1.5 million bpd overall for the year and only 1.25 million bpd for 2016. OPEC data indicates about 1 million barrels of surplus supply relative to demand.

Figure 3. Supply/demand growth for first three quarters 2015, mb/d. Source: OPEC November 2015 Monthly Oil Market Report.

Figure 4. U.S. crude oil production and forecast. Source: EIA and Labyrinth Consulting Services, Inc.

The good news is that the EIA forecasts an ongoing decline in U.S. oil production of more than 1 million bpd by September 2016.

Overall, the outlook suggests a persistent market imbalance. Supply growth has stopped but remains higher than demand and the forecast is for weaker demand growth going forward. The only near-term hope for improved prices, therefore, is a decline in world production of about 1 million barrels per day. Falling U.S. production will help move fundamentals toward balance but represents too little decline over too long a period to bring price relief any time soon.

Last week, Daniel Yergin and Andy Hall predicted that oil prices had reached a bottom. I fear that their optimism is based on sentiment. Although it makes sense that lower oil prices should result in increased demand, data offers little encouragement so far.

A weak global economy that is over-loaded with debt is a powerful obstacle to oil-demand growth. Only the pain of lower prices will force global producers to reduce supply enough to create an oil-price recovery. By Art Berman, Oilprice.com

Now it’s getting serious. Read… Giant Sucking Sound of Capital Destruction in US Oil & Gas

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  16 comments for “The Global Oil Glut Is Getting Worse, Not Better

  1. Mary
    Nov 12, 2015 at 10:26 pm

    I don’t know why do people continue to use these negative adjectives like ‘glut’, ‘worse’ etc.

    Oil is a highly useful commodity and having more of it is good, for the production of goods and services. Period. Let the energy companies go bankrupt because of the ‘glut’, other industries will replace them. When there is a lot of something that is an incentive to consume it rather than producing it. It is all simple economics.

    Only a Keynesian or an energy company CEO would think that lack of oil and sky-high prices are ‘good’ while the opposite is ‘bad’.

    • Jason
      Nov 13, 2015 at 6:31 am

      “Only a Keynesian or an energy company CEO would think that lack of oil and sky-high prices are ‘good’ while the opposite is ‘bad’.”

      I find this to be an untrue statement. When oil prices go below the cost of production for many companies we have a fundamental problem. This will cause lots and lots of bankruptcies and ultimately lower the amount of oil supply considerably. And then when demand doesn’t go into the toilet, because oil is mandatory for so many countries and people, the price is going to go vertical. That is if we even get to that point. The rolling bankruptcies in things like coal, copper, and oil could potentially take the entire system down.

      • Richard
        Nov 13, 2015 at 10:36 pm

        Sorry to have to break the news to you but when the price of anything goes below the “production price”, guess what… the “production price” goes down as well. Your argument was supposed to be why gold “couldn’t” go below a certain price: the mines “couldn’t” afford to dig it out of the ground anymore. Didn’t quite work out like God intended, did it?

    • Richard
      Nov 13, 2015 at 8:18 am

      I completely agree. I scrolled down intending to make the exact same comment. But you have to realise, these people are not on your side. They are on the side of the moneyed interests. So of course they think that ‘down is bad’ and ‘up is good’. It’s sickening and disgusting. But I assure you, these people WILL SEE THEIR COMEUPPANCE very very soon…

      • Keith
        Nov 13, 2015 at 8:55 am

        From a viewpoint of supply and demand which can be adjusted immediately that makes sense but ……..

        Oil exploration and deep sea projects take a long time to come on line (10 years or so). Opening up production that has been shut down also takes time.

        As the price has been low for a while, then investment is being put on hold and current production is being closed down where it is expensive.

        There is a high probability that when the excess phase is over that prices will shoot up before extra supply can come online.

        Oil is not like dealing with warehouses full of tins of baked beans where supply and demand can be adjusted immediately.

        Also, current excess is indicating lack of demand in the global economy like all other commodity prices which is bad news.

        Commodities are telling us the global economy is tanking..

        • Jerry Bear
          Nov 15, 2015 at 5:51 am

          You know, I see us already locked into a deflationary death spiral that can only lead to disaster if we don’t start dealing with it now. The engine driving deflation in my view is the all pervasive austerity measures that are being implemented worldwide. There is no logical reason for manufacturers to invest in productive capacity and create jobs if people cannot afford to buy the goods produced because they are too poor. We find productive capacity worldwide diminishing and trade, both on the national and international level shrinking while wages are constantly falling and unemployment constantly increasing. You guys sometimes remind me of that old fable about the 6 blind men and the elephant. You need to open your eyes and see the whole of what is happening. Don’t let your selves be blinded by philosophical presumption or ideological bias. Don’t be manipulated by propaganda. See the world through your own eyes..

        • Keith
          Nov 15, 2015 at 8:04 am

          “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.” Warren Buffett

          This has rolled out globally with the Neo-liberal ideology.

          The 1% have gone to war against the 99% (aka the global consumer base)

          This is what the 1% winning looks like – global recession.

          How is the global consumer base these days?

          1) The once wealthy Western consumer has had all their high paying jobs off-shored. As a stop gap solution they were allowed to carry on consuming through debt. They are now maxed out on debt.

          2) Japanese consumers have been living in a stagnant economy for decades.

          3) Chinese and Eastern consumers were always poorly paid and with nonexistent welfare states are always saving for a rainy day. Western demand slumped in 2008 and the debt fuelled stop gap has now come to an end.

          4) The Middle Eastern consumers are now too busy fighting each other to think about consuming anything and are just concerned with saying alive.

          5) South American and African consumers are busy struggling with economies that are disintegrating fast.

          The 1% have nearly won.

      • Jerry Bear
        Nov 15, 2015 at 5:36 am

        A revolution huh? Unfortunately it doesn’t stop there. Real revolutions are extremely messy and bloody affairs that bring out the worst in human nature. in the French Revolution, an awful lot of innocent people’s heads went thump in the basket while mobs howled below. Don’t be too sure that you will be one of the survivors.
        P.S. I think the petroleum market will gradually diminish and be reduced mainly to chemical feedstock. There is no intrinsic technological reason why we should have to rely on fossil fuels for energy. It is primarily because certain extremely wealthy vested interests profit from having it so.

    • meat wad
      Nov 13, 2015 at 5:13 pm

      “It is all simple economics”

      A very popular mindset.

      There is also simple ecology.

      But we don’t have to talk about that here.

  2. Keith
    Nov 13, 2015 at 4:53 am

    We are always looking at various levels in the economic pyramid to judge its health.

    I would suggest we look at its foundations, the global consumer:

    1) The once wealthy Western consumer has had all their high paying jobs off-shored. As a stop gap solution they were allowed to carry on consuming through debt. They are now maxed out on debt.

    2) Japanese consumers have been living in a stagnant economy for decades.

    3) Chinese and Eastern consumers were always poorly paid and with nonexistent welfare states are always saving for a rainy day. Western demand slumped in 2008 and the debt fuelled stop gap has now come to an end.

    4) The Middle Eastern consumers are now too busy fighting each other to think about consuming anything and are just concerned with saying alive.

    5) South American and African consumers are busy struggling with economies that are disintegrating fast.

    Now I understand.

    • Petunia
      Nov 13, 2015 at 10:26 am

      I think the decline in the oil price is directly linked to the US retreating from the ME. Wars are fought on oceans of oil and we are not using as much as in the last decade. Also, the US govt doesn’t care what they pay for anything, and they paid a lot for the oil they used.

      They are also greasing the upcoming election with plentiful supply and low prices. Obama did this last time and it looks like more of the same.

  3. Baab
    Nov 13, 2015 at 11:15 am

    If you think this wasn’t planned by the shadowed interests then enacted through central planners and .gov…… Think again!

    • Jerry Bear
      Nov 15, 2015 at 9:56 pm

      The Saudis have played the key role in the oil glut. It certainly is not in the interest of U.S. oil companies to have prices so low. The Saudis apparently want to ruin companies using fracking or exploiting oil shale or tar sands so they don’t become competitors. I think the theory the Saudis are using is that once they knock off their competitors, the can sharply cut production and prices will rise. But by the time that happens. demand may be so depressed that the prices very much at all. The Saudis are killing the oil industry thinkings they can profit from it.

  4. Peepot
    Nov 13, 2015 at 1:48 pm

    THE END OF CHEAP OIL

    Global production of conventional oil will begin to decline sooner than most people think, probably within 10 years
    Feb 14, 1998 |By Colin J. Campbell and Jean H. Laherrre http://www.scientificamerican.com/article/the-end-of-cheap-oil/

    Marginal oil production costs are heading towards $100/barrel http://ftalphaville.ft.com/2012/05/02/983171/marginal-oil-production-costs-are-heading-towards-100barrel/

    The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. http://ftalphaville.ft.com/2012/05/02/983171/marginal-oil-production-costs-are-heading-towards-100barrel/

    Steven Kopits from Douglas-Westwood said the productivity of new capital spending has fallen by a factor of five since 2000. “The vast majority of public oil and gas companies require oil prices of over $100 to achieve positive free cash flow under current capex and dividend programmes. Nearly half of the industry needs more than $120,” he said http://www.telegraph.co.uk/finance/newsbysector/energy/oilandgas/11024845/Oil-and-gas-company-debt-soars-to-danger-levels-to-cover-shortfall-in-cash.html

    Sanford C. Bernstein, the Wall Street research company, calls the rapid increase in production costs “the dark side of the golden age of shale”. In a recent analysis, it estimates that non-Opec marginal cost of production rose last year to $104.5 a barrel, up more than 13 per cent from $92.3 a barrel in 2011. http://www.ft.com/intl/cms/s/0/ec3bb622-c794-11e2-9c52-00144feab7de.html#axzz3T4sTXDB5

  5. Robt
    Nov 14, 2015 at 10:50 am

    The odd thing in this current cycle is that low prices are considered a crisis, with marginal costs given as the culprit, whereas even when the price went to 10 dollars a barrel in the ’90s it was considered a blessing.
    Every cycle of either oil shortage or oil glut always makes me think back to the impeccably mannered and perfectly logical Sheik Yamani who was the Saudi Oil Minister and Minister of OPEC. Despite all the frantic questions and accusations by the media in times of shortages and high prices he would just calmly reply that the market would take care of it, in terms of both supply and price. Let’s not forget that in the late ’70s, according to the ‘experts’ and all the leading newsmagazines we were to run out of oil by 1987. Today, world oil consumption is 50% higher than 1980 and we have a glut, probably at the 1980 inflation-adjusted price of 15 dollars a barrel whereas the 1980 price was about 37 dollars, equivalent to about 115 today.
    Of course, OPEC has never really had any power to ‘set’ prices; they simply periodically revised their benchmark price to spot, and like all price control schemes if the price is too high, members will sell more than their quota under the table for less and vice-versa. Consumer countries that hoarded or just overstocked during the good times ensured periodic wild upward price swings and excess inventory or periodic synchronized world recession cured that.
    The same phenomenon is taking place in the mining business. Whereas it was economically viable to mine and sell gold at 300 an ounce, or copper at a dollar, over the past few years marginal costs have at least tripled. With oil, the marginal cost is 3 to 4 times what it was 15 years ago. Like ‘alternative energy’, the cost of new supply acquisition methods is partly to blame, but a big factor must also be the cost-push effect of inflation, though we supposedly have a less-than-two percent inflation rate. Even to double costs in 15 years takes more than 5% inflation.

  6. Jerry Bear
    Nov 15, 2015 at 10:10 pm

    What made marginal costs go up so much? Is this the result of manipulations by speculators, or the use of less optimal processes that make it more expensive to extract? I would expect something like that to take place in a steamy overheated inflationary economy, not the chilling depressed one we actually have.

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