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Page added on August 31, 2015

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There’s a New Oil Glut in Town

Consumption

As crude oil continues to rip higher—it’s currently in the midst of its best three-day performance since January 2009—analysts at Barclays highlight one reason why this rally could prove to be short-lived.

Resilience in U.S. shale production and supply increases from members of OPEC have left global oil markets in a prolonged state of surplus.

Earlier in the year, this oil surplus was relatively easy to spot in the form of rising U.S. inventories.

Bloomberg

But with U.S. crude stockpiles trending downward since late April, a new glut has emerged, according to Barclays.

“The surplus in the petroleum market is increasingly evident in refined products,” says the team led by commodities analyst Miswin Mahesh. “Global refinery throughput touched a record high of 80.6 million barrels per day in July, with utilization rates at the highest in eight years.”

Barclays

This product glut is less intense than the crude surplus and took a little longer to materialize, as elevated crack spreads and heavy demand for gasoline prompted refiners to run on full blast.

Elevated refinery margins and a steep contango structure in the oil futures curve that created incentivizes for traders to lock in profits by engaging in storage arbitrage were two key sources of demand for crude that helped pull WTI crude off its March lows. The gap between the spot price and the 12-month futures contract has proceeded to narrow since then, effectively eroding the profitability of the storage trade.

And with refiners heading into the traditional fall period of scheduled maintenance, this global source of demand for crude is poised to wane by 2 million barrels per day in September and by 2.7 million barrels per day in October, according to Mahesh. This development could cause worries about U.S. storage tanks getting filled to the brim to reemerge unless crude output is suitably curtailed as refineries go offline.

“If supply does not adjust swiftly by then, crude stocks could swell faster again,” writes Mahesh. “To a certain extent, as the market trades the shoulder month contracts, these expectations are getting priced in.”

Barclays is sticking with its call that oil prices will rise by year’s end as the supply-demand imbalance eases, while cautioning that higher than anticipated refinery maintenance, a slowdown in China, continued strength in the U.S. shale industry, increased supply from Iran, and a U.S.-dollar rally together constitute a long list of notable risks to its forecast

bloomberg



10 Comments on "There’s a New Oil Glut in Town"

  1. penury on Mon, 31st Aug 2015 8:52 pm 

    IMHO the problem remains.people have no money. Import nations have no money, payment in dollars is destroying the economies of EMs. However, my prediction is (wrong as usual) that this will be a very short lived situation and the bounce will be downward not upward.

  2. Davy on Mon, 31st Aug 2015 9:05 pm 

    Pen, we are getting close to technical incongruities in markets, currencies, and debt service. At some points there will be convergences of these incongruities into one big shit storm.

    China is flying apart with completely incompetent leadership. The fed is stuck with promises it can’t keep. How can markets stomach that very long? Commodities are dumping along with their EM countries. Everywhere you look there is a minefield.

  3. Bloomer on Mon, 31st Aug 2015 10:08 pm 

    U.S. oil production has shown resilience, however the peak is in and at sub $50 a barrel, production should wane from here. Oil prices will soon stabilize as will China. With the exception of some Black Swan event, the stars are lining up for global economic improvement.

  4. Plantagenet on Tue, 1st Sep 2015 4:06 am 

    The oil glut continues. The low prices actually create an incentive for oil producers to move as much product as possible to keep their cash flows up

  5. rockman on Tue, 1st Sep 2015 6:41 am 

    First, the absudity of saying the shale players are “resilient”. Rig count dropping from 1,600 to less than 800??? And please don’t respond with the “more efficient” BS: wells are drilled today with the exact same equipment and methods used a year ago. Dozens of companies have filed bankruptcy or been acquired by other companies. Dozens of pubco shales players that saw stocks boom to $15, $30 or more per share are nos trading for less then $1/share. If this is the standard for resilience I wonder how the would characterize hard times. LOL

    Second, waning for sure now that the time lag between drilling and first production has passed.

    As far as money goed the world has a sh*tload when it comes to buying oil: it is buying every bbl of the record amount of oil being produced today. Folks still don’t understand the real meaning of “glut”: there’s so much of a commodity that much sits in inventory due to a lack of buyers. There is no lack of buyers for all the oil currently being produced. Having to lower prices to levels sufficient to induce sales is not a glut dynamic…it’s a marketing dynamic. There is no glut of cell phones just because they are priced at a level to induce the sale of hundreds of millions of them.

  6. BobInget on Tue, 1st Sep 2015 11:12 am 

    I completely agree Rockman.

    Except for this old fart, few here factor in the geopolitical chaos that surrounds African, MiddleEast and SouthAmerican oil suppliers.

    Perhaps because we, the US, has been at war
    for over a decade, you believe its a ‘new normal.’

    http://www.washingtonsblog.com/2013/05/u-s-currently-fighting-74-different-wars-that-it-publicly-admits.html

    http://www.cfr.org/global/global-conflict-tracker/p32137#!/

    http://www.nytimes.com/interactive/2014/06/12/world/middleeast/the-iraq-isis-conflict-in-maps-photos-and-video.html

  7. beammeup on Tue, 1st Sep 2015 12:39 pm 

    Rock – I’ve read many recent articles touting the improved efficiency of US shale producers. When you dig down into the details of the few articles that actually describe these improvements, it seems that most of the “efficiency” gains come down to pricing concessions from suppliers. As you know, many of the suppliers to US shale are in a desperate struggle to keep the doors open, so they’re lowering their prices to levels that are unsustainable on a long term basis, but make the producers more financially efficient in the short term. IMO, it’s disingenuous to describe that as a structural efficiency improvement, but I believe that’s mostly what these articles are touting.

  8. Boat on Tue, 1st Sep 2015 2:34 pm 

    Rock,
    As far as money goed the world has a sh*tload when it comes to buying oil: it is buying every bbl of the record amount of oil being produced today
    beameup,

    There is no lack of buyers for all the oil currently being produced. Having to lower prices to levels sufficient to induce sales is not a glut dynamic…it’s a marketing dynamic.

    Why is inventory high and growing if there are plenty of buyers even at a low price. Seems like a shortage of buyers to me.

  9. beammeup on Wed, 2nd Sep 2015 1:24 pm 

    Boat – My comment above had nothing to do with the question of whether or not a glut exists. It was strictly related to the question of efficiency improvements in US shale. Not sure why you addressed the second part of your post to me.

  10. GregT on Wed, 2nd Sep 2015 1:35 pm 

    “Why is inventory high and growing if there are plenty of buyers even at a low price.”

    Because Boat, oil is not at a “low price”. Oil prices are currently in recessionary territory. When prices drop below ~$20/bbl, only then will oil be at a “low price”.

    Of course, there really is no point in trying to explain this to you, yet again. You obviously don’t have the capacity to figure it out. As easy as it should be.

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