For those oil bulls who think lower investment in oil production over the last couple of years is set to finally take the surplus out of the market, this article will arrive as bad news. This piece should be understood in the context of recent IEA guidance which says the oil glut will continue through the first half of 2017, and says that a large amount of new oil production is set to come online as the high investment, long-term projects set in motion between 2011 and 2014 are now finally set to start pumping oil. Back in those days oil prices were running at $100 per barrel, which meant a huge amount of capex was taking place in new oil infrastructure, and the fruit of that investment is now coming online at a terrible time.
OxWFD: This is an insightful and terrifying article for oil investors. It reinforces our long-standing view that the oil glut, and thus weak prices, are going nowhere.
Source: Financial Times
We have covered a lot of oil stories over the last few years, including some really great charts that our readers have liked. What we have here today is different, but is nonetheless the best single picture capturing the oil glut that we have seen. The picture is more subtle than one would think, but once you take it in and see what it is, you come to realize just how oversupplied the oil market is. The picture is at the top of the linked story (Financial Times) and shows two giant oil tankers sitting just off the coast of the UK. The tankers are simply parked there because traders are hoping they can make money from waiting out the market. This is occurring all over the UK coast, from Scotland in the north to Cornwall in the south of England.
OxWFD: The more we looked at this picture the more profound it seemed to us that the oil market is so oversupplied that traders are storing the commodity on ships. This is by no means rare, but rarely is there so obvious a picture. US oil is trading near $40 per barrel.
Source: Financial Times
In what has to be one of the most eye-opening and nonsensical statistics, new data shows that US oil imports are rising despite the huge glut in shale oil. Crude imports into the US have now risen 20% from a year ago despite very low average prices over the same period. The figure one year ago was near a 20-year low, but has since risen to about 8 mbd. However, part of the rise can be explained by storage space. The US still has plenty of oil storage space while the rest of the world is running out, meaning the US is a good place to stash oil.
OxWFD: It is amazing that the US still imports and consumes so much foreign oil despite having world-leading production. We think this stock build will start to put more pressure on US oil prices.
Source: Wall Street Journal
This Financial Times article reports potentially useful information compiled by the newspaper. According to the piece, there is more than 100m barrels of crude oil currently at sea, meaning loaded on tanker ships. Unlike during the last price collapse, this time only half the oil on the water is there because traders are waiting for prices to rise. This huge level of inventory exists because of rampant oversupply in the market, including very high levels of onshore storage, which is pushing oil onto the water. The current level of more than 100m barrels currently at sea is at least double levels of earlier this year. According to the CEO of Euronav, one of the world’s largest listed tanker companies, “We are being kept at relatively low speeds. The owners of the oil are not in a hurry to get their cargoes. They are managing their storage capacity by keeping ships at a certain speed”.
OxWFD: This is a very high figure, and while we are not experts at interpreting this sort of physical oil data, it does seem to be a symptom of the current huge glut in oil markets.
Source: Financial Times
The International Energy Agency’s (IEA) highly anticipated annual outlook has been released and it paints a very bearish picture for oil. The IEA says oil demand will only rise at less than 1% a year until 2020, below the level needed to “quickly” absorb the glut of supply that dominates markets. According to the IEA, “Demand is not as strong as we have seen in the past as a result of efficiency [and climate] policies [globally]”. The agency says crude oil will not reach $80 per barrel until 2020. Additionally, the agency added the warning that “Big energy companies are underestimating the effects of all of these things on the demand side”.
OxWFD: This is a very bearish outlook for oil demand and prices from a leader in the field. We have no argument against their view, as it seems a multitude of forces have come together in a perfect storm to keep prices low.
Source: Financial Times
Barclays says there is a new glut in oil. After months of heavy oversupply, crude stockpiles have been trending down, but now refined products are piling up. Refinery throughput hit a record high last month. However, this strong source of demand is set to wane as we head into Autumn, with Barclays forecasting that demand for crude will fall by 2 million barrels per day (mbd) in September and 2.7 mbd in October. This could then spark renewed worries about US oil storage tanks filling up. Barclays is maintaining their position that prices will rise by the end of the year, but they cite many reasons why this may not happen, including higher than expected refinery maintenance, a US Dollar rally, or increased output from Iran.
OxWFD: Given this article and all the risks they cite, it is hard to imagine that Barclays actually think oil prices will rise. In our opinion, this most recent rally is way overblown and prices will fall back significantly.
The Wall Street Journal has run an informative article on how a successful Iranian deal might affect oil markets. The piece takes the position that a successful deal with Iran could see the world’s oil glut worsen considerably by the end of next year as Iran may sell 30m stored barrels into the market as well as 3.5 million barrels per day by the end of 2016. The country is currently producing about 2.7 mbd but would likely increase production by around 700k barrels by the end of next year. Such an increase in capacity would significantly worsen the oil glut, as the US Department of Energy says the world is currently suffering from excess supply of 1.24 million barrels per day. Overall, if Tehran were to sell its stored oil and then produce at the level forecasted, more than 600 million barrels of oil would flow into storage this year, more than the last five years combined.
OxWFD: According to this article, the Iranian deal poses a serious and credible threat to oil prices as the country’s supply would greatly exacerbate the glut.
The oil supply glut gripping the globe may set to worsen as Chinese demand for the commodity slows in the face of growing stockpiles. The country only rarely releases data on the stock of its Strategic Petroleum Reserves, but some believe the country will now be slowing its purchases. China is the second largest global consumer of petroleum and it had been a formidable power as it sought to fill its reserves with cheap oil. Additionally, Chinese demand might be lower over the coming few months as the country’s refiners enter their spring maintenance season. This is a time when such businesses buy less crude oil, a fact that could also dent global oil benchmarks.
OxWFD: This is very worrying as Chinese demand is one of the few forces that has been supporting oil prices. If demand falls considerably in the second largest market at the same time as global output continues to rise, where will oil prices settle?