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Oil Prices Will Never Recover Until Global Inventories Correct

Friday, March 10, 2017 4:41
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(Before It's News)

From ""
target="_blank">Art Berman
: WTI futures fell $2.86 from $53.14
to $50.28 per barrel, and Brent futures dropped $3.81 from $55.92
to $52.11 per barrel. WTI is trading below $49 and Brent below $52
per barrel at the time of writing. "more-157725">

The apparent cause was a larger-than-expected 8.2 million-barrel
(mmb) addition to U.S. crude oil inventories.


Based on history, we can see that this was an over-reaction. WTI
has fallen below the $50 to $55 per barrel range in which oil
futures have traded for the last 3 months (Figure 1).

"" target=
"_blank"> "" width="450"
height="326" />
(Click to enlarge)

Figure 1. Oil prices have not exceeded $55 per barrel since
early 2015. Source: EIA, CBOE and Labyrinth Consulting Services,

An 8.2 mmb addition to crude oil storage is actually fairly
normal during the annual re-stocking season that we are in now
(Figure 2). Inventories increased 10.4 mmb during this week in 2016
and the 5-year average for this date is 5.3 mmb.

"" target=
"_blank"> "" width="451"
height="328" />
(Click to enlarge)

An 8.2 million barrel addition is fairly normal for
re-stocking season. Source: EIA and Labyrinth Consulting Services,

The fact that inventories have been in record territory since
the beginning of 2015 has not kept oil futures from going through
several rallies or from trading near $55 per barrel since November.
The 13.8 mmb addition to storage a month ago was larger than
yesterday’s amount yet prices barely responded.

Comparative inventory–the crucial price indicator-only moved up
2.4 mmb (Figure 3). That is because we are in the re-stocking
season and compared with previous years, this addition to storage
is not that big. Other key measures of gasoline and diesel volumes
fell by more than 1 mmb each.

"" target=
"_blank"> "" width="450"
height="327" />
(Click to enlarge)

Figure 3. Comparative crude oil plus refined products
inventory increased only +2.4 mmb. Source: EIA and Labyrinth
Consulting Services, Inc.

And there was some very good news this week that the markets
ignored. EIA’s Short-Term Energy Outlook (STEO) showed that the
global market balance (production minus consumption) moved to a
deficit last month. The world consumed almost a million barrels
more than it produced in February (Figure 4).

"" target=
"_blank"> "" width="450"
height="308" />
(Click to enlarge)

Figure 4. The world liquids market balance (production minus
consumption) was -1 mmb/d in February 2017. Source: EIA March 2017
STEO and Labyrinth Consulting Services, Inc.

This is a one-month data point and should not be seen as a
trend. Still, it is a positive sign that seems to have been
overwhelmed by an otherwise normal addition to U.S. storage.

The March STEO also had good news about world demand. The
average liquids consumption growth for 2016 was 1.5 mmb/d and 1.6
mmb/d for the first two months of 2017 (Figure 5).

"" target=
"_blank"> "" width="450"
height="328" />
(Click to enlarge)

Figure 5. 2016 global liquids consumption growth: +1.5
mmb/d, early 2017: +1.6 mmb/d. Source: EIA March 2015 STEO and
Labyrinth Consulting Services, Inc.

In mid-2016, there were indications that consumption was only
growing at only about 1.2 mmb/d but particularly strong
year-over-year performance from August through January have
brightened that outlook.

Turning Point

Although yesterday’s price plunge may have been an
over-reaction, it may also represent a turning point for prices to
adjust downward.

I have written for months that global oil inventories must fall
before prices can make a sustainable recovery, yet they remain near
record levels. OECD inventories fell 15 mmb in February but are
nearly 550 million barrels above December 2013 levels (Figure

"" target=
"_blank"> "" width="451"
height="329" />
(Click to enlarge)

Figure 6. OECD incremental liquids inventories are near
record high levels. Source: EIA and Labyrinth Consulting Services,

Brent was probably ""
target="_blank">$10 over-valued
at $55 and WTI was at least $6
over-valued at $54 per barrel as Figure 1 shows.

The other negative weighing on oil prices is the increase in
U.S. crude oil production. Output has increased 420,000 b/d since
September and EIA forecasts that it will exceed 10 mmb/d by
December 2018 (Figure 7). That is higher than 1970 peak production
and 1.1 mmb/d more than current levels. In short, this would more
than cancel the U.S. decline since oil prices collapsed in late

"" target=
"_blank"> "" width="449"
height="326" />
(Click to enlarge)

Figure 7. EIA U.S. crude oil forecast is 10.1 mmb/d and $59
WTI by December 2018. Source: EIA March 2017 STEO and Labyrinth
Consulting Services, Inc.

Over-Reaction or Turning Point?

This week’s price downturn reflects waning confidence that OPEC
production cuts will result in higher prices. Much of the
discussion until now has centered on whether OPEC will deliver on
the announced cuts or if output increases by Libya and Nigeria will
offset those cuts.

There seems to be a growing awareness that global oil markets
are incredibly complex, and that there are so many moving parts
that a single, simple solution is unlikely.

The problem may be about expectations. Many believe that the
OPEC cuts will increase prices but the cuts may be more about
establishing a floor under those prices.

There is no good reason why a normal addition to U.S. inventory
should affect prices so much. The timing of this price adjustment
may be an over-reaction but the direction may also represent a
turning point.

The larger issue is the inexorable relationship between stocks
and prices. It’s not so much about this week’s change in inventory.
It’s about how much inventory needs to be reduced and how long that
will take in the most hopeful scenario.

If OECD stocks must fall by approximately 550 million barrels to
support $70 prices, it will take more than a year to get there if
production is cut by 1 mmb/d. If the production-consumption balance
fluctuates, it will take even longer.

For more than two years, the industry has believed that higher
prices are possible without extreme reductions in stocks. That is a
dream. Perhaps markets have woken up from that dream.

The United States Oil Fund LP ETF ( target="_blank" href="/r2/?url=" target=
fell $0.01 (-0.09%) in premarket
trading Friday. Year-to-date, USO has declined -10.15%, versus a
+5.96% rise in the benchmark S&P 500 index during the same

USO currently has an "" target="_blank">ETF Daily
News SMART Grade
of B (Buy), and is ranked #25
of 122 ETFs in the ""
target="_blank">Commodity ETFs

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