Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Oil Prices Won't Stage a Serious Rebound Until
Crude Oil Storage Decreases
Oil Price, Al-Jazeerah, CCUN, March 25, 2016
Oil prices have shown signs of life over the past few weeks, as
production declines in the U.S. raise expectations that the market is
starting to adjust. As a result, Brent crude recently surpassed $40 per
barrel for the first time in months.
A growling list of companies
are capitulating, announcing production cuts for 2016. Continental
Resources, for example, could see
output fall by 10 percent. A range of other companies have made
similar announcements in recent weeks. The energy world has been
speculating about declines from U.S. shale, and the declines are finally
starting to show up in the data.
Despite the newfound optimism
that oil markets are balancing out, crude oil sitting in storage is at a
record high in the United States. Energy investors may have preferred to
focus on the U.S. production declines, or the fall in
inventories in early March, but meanwhile crude oil stocks continue to
signal that oversupply persists.
Crude stocks rose once again last
week, hitting yet another
record of 521 million barrels. Storage levels at Cushing, Oklahoma, an
all-important hub where the WTI benchmark price is determined, have
surpassed 90 percent of capacity. U.S. output may be starting to decline,
but it is doing so at a painfully slow rate.
It isn't just a U.S.
problem. Crude oil storage levels continue to climb around the world.
Commercial stocks in the OECD surpassed 3 billion barrels in 2015. The EIA
sees oil storage in the OECD rising to 3.24 billion barrels by the end of
this year. It doesn't stop there. Storage levels rise a bit more next
year, hitting 3.30 billion barrels by the end of 2017.
That is a
staggering forecast that should scare any oil investor. It also suggests
that the price rally over the past few weeks, which has pushed oil prices
up around 40 percent since early February, could be fleeting. There is
evidence that suggests the rally was driven by speculators
closing out short bets on oil, after accruing net-short positions at
multiyear highs in recent months. In early March, hedge funds and other
major investors shed short positions at the fastest rate in almost a year.
The rally, then, hinged on the sudden shift in sentiment from oil
The underlying fundamentals, however, have not
appreciably changed in recent weeks. U.S. oil production is declining, but
more or less at the same pace that it has for months.
On the other
hand, rising inventories undercut the notion that the market is adjusting.
As a result, as the short-covering rally reaches its limits, and the
markets digest the fact that the world is still oversupplied with
oil, prices could fall once again.
The problem, as mentioned
above, is that inventories could continue to rise around the world through
the rest of this year, if EIA data is anything to go by. Oil prices may
have rallied in recent weeks, but the EIA was more pessimistic in March
than it was in February. The EIA says that global storage levels could
rise by 1.6 million barrels per day (million b/d) in 2016 and by another
0.6 million b/d in 2017. Those predictions are higher than the EIA's
"With large global oil inventory builds
expected to continue in 2016, oil prices are expected to remain near
current levels," the EIA concluded in early March. The EIA lowered its
price forecast for Brent by $3 per barrel, expecting it to average $34 for
the year. 2017 does not look much better: the EIA sees Brent prices
averaging just $40 per barrel next year, a whopping $10 lower than what
the EIA predicted last month. That could mean prices stay below $50 per
barrel through 2017.
Price forecasts are always wrong, and often
wildly off the mark. While it is difficult, if not impossible, to
accurately predict price movements, especially a year or two out, it is
impossible to argue with the sky-high levels of oil sitting in storage.
Even if U.S. oil production continues to decline, the greater than 500
million barrels of oil inventories – a record high – need to start
declining in a substantial way before the oil markets will see a sustained
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