Don't Believe The Hype: Oil Markets Far From Recovery

Tyler Durden's picture

Authored by Arthur Berman via,

Global oil inventories are falling because of OPEC and non-OPEC production cuts, but the road to market balance will be long.

Production cuts have removed approximately 1.8 million barrels per day (mmb/d) of liquids from the world market since November 2016 (Figure 1).

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Figure 1. OPEC-NOPEC Have Cut 1.8 mmb/d Liquids Since November 2016. Source: EIA April 2017 STEO, EIA International Data and Labyrinth Consulting Services, Inc.

Saudi Arabia has cut 619 kb/d (35 percent of total) and the Gulf States Cooperation Council—including Saudi Arabia—has cut 1,159 kb/d (65 percent of the total). Other significant contributors outside the GCC include Iraq (12 percent), Russia (12 percent) and Mexico (9 percent) (Table 1). Nigeria’s cuts are probably involuntary since it was exempted from the OPEC agreement. Iran and Libya–also exempted–and both increased production.

Table 1. Summary table of OPEC-Non OPEC production cuts, November 2016 through March 2017. Source: EIA April 2017 STEO, EIA International Data and Labyrinth Consulting Services, Inc.

Inventories and The Forward Curve

OECD inventories began falling in July 2016, four months before the OPEC production cuts were finalized. Stock levels have declined approximately 107 mmb according to recently revised EIA STEO data (Figure 2). That includes the January 2017 increase recently noted in the April IEA Oil Market Report.

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Figure 2. OECD inventories have fallen more than 100 million barrels since July 2016. Source: EIA April 2017 STEO and Labyrinth Consulting Services, Inc.

Although this represents progress toward market balance, stocks must fall at least another 260 mmb to reach the 5-year average level to support oil prices in the $70 per barrel range.

Almost three-quarters (73 percent) of OECD decline was from non-U.S. inventories. Perhaps the intent of OPEC’s November cuts was to stimulate a decrease in U.S. inventories (about 45 percent of the OECD total). U.S. stocks and comparative inventories were increasing at the time of the cuts and did not start to fall until February 2017 (Figure 3). Since mid-February, U.S. stocks and comparative inventory have each declined 20 percent.

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Figure 3. U.S. Comparative Inventories Have Fallen 20 percent Since Mid-February 2017. Source: EIA and Labyrinth Consulting Services, Inc.

Still, U.S. inventories must fall another ~143 mmb to reach the 5-year average (Figure 4).

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Figure 4. U.S. Crude Oil + Refined Product Inventories Must Fall 143 Million Barrels. Source: EIA and Labyrinth Consulting Services, Inc.

The immediate results of the OPEC cuts were an increase in oil prices and an important change in the term structure of crude oil futures contracts. Before the cuts were announced, the term structure of the WTI oil futures curve was in contango (prices are higher in the near-future). That favored storing rather than selling oil and contributed to growing inventory levels (Figure 5).

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Figure 5. The Term Structure of WTI Futures Contracts Changed From Contango To Backwardation After the OPEC Production Cut in Late November 2016. Source: CME and Labyrinth Consulting Services, Inc.

In early March 2017, however, oil prices fell as investors lost confidence that the cuts were working. Forward curves moved into weak backwardation (prices are lower in the near-future). Now, prices have increased with outages in Canada and Libya, and the forward curve has moved into stronger backwardation. That favors selling rather than storing crude oil and contributes to decreasing inventory levels.

Market Balance, Supply and Demand

The latest IEA Oil Market Report stated, “It can be argued confidently that the market is already very close to balance.” What does that mean?

Market balance means that production and consumption are approximately equal. That is an important first step for a market in which production has exceeded consumption for most of the last 3 years but it hardly means that $70 oil prices are around the corner.

Market balance must be expanded to be useful: production is not the same as supply, and consumption is not the same as demand. Supply is production plus inventory. Demand is the quantity of oil the market is willing to buy at a certain price–it may be either more or less than production.

Oil prices collapsed in 2014 because demand wasn’t great enough at $100 per barrel to absorb the output from the 2010-2014 production bubble. Prices collapsed to $30 per barrel before a transformed market began a weak and uneven recovery, and production surpluses began to decrease slowly (Figure 6).

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Figure 6. Critical Supply & Demand Are In Approximate Balance. Source: EIA April 2017 STEO, IEA OMR, OPEC MOMR and Labyrinth Consulting Services, Inc.

Demand did not increase enough until July 2016 to require critical supply withdrawals from inventory–a small subset of total supply. U.S. inventories did not begin to decline until after the OPEC cuts took effect in February 2017.

In the real world, the 5-year average inventory level represents a dynamic proxy for market balance. Comparative inventory is the measure of how far the present market must rise or fall to reach that level. IEA data indicates that inventories are 330 mmb above the 5-year average although revised EIA data suggests that levels are closer to 260 mmb higher than that important benchmark. In either case, it will take 6 months to a year to approach the 5-year average.

Demand Growth

Weakening demand growth is the potential barrier to continued inventory reduction and price recovery assuming that OPEC production cuts hold and are extended. Annual demand growth has declined to 1.25 mmb/d from the comparatively robust 2 mmb/d growth in 2015 and 1.62 mmb/d in 2016 (Figure 7). IEA forecasts continued weak demand growth for 2017. Related: Iran Ready To Join OPEC’s Production Cut Extension

Figure 7. 2017 Demand Growth Has Fallen To 1.25 mmb/d. Source: EIA April 2017 STEO, IEA OMR, OPEC MOMR and Labyrinth Consulting Services, Inc.

The problem, of course, is that demand is highly price-sensitive in a global economy that is burdened by unmanageable debt. Demand lags price and demand growth reflects the full spectrum of economic headwinds. In early 2016, oil prices reached the lowest level in a decade-and-a-half. After that, year-over-year demand and oil prices increased through November 2016 and yet, demand growth in 2016 was lower than in 2015. Since then, $45 to $55 per barrel prices appear to have depressed demand growth to annual levels of about 1.25 mmb/d.

The OPEC cuts are accelerating the reduction of global inventories but continued progress toward the 5-year average will push oil prices higher. Higher prices may collide with weak demand growth in a stagnant economy that simply needs less oil. The long road to market balance may be slower and bumpier than bullish analysts predict.

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VD's picture

crude over 25 is blatant scam. at 50 it is collusive rape. thank the fed as much as opec.

VinceFostersGhost's picture



Does anyone have the tanker traffic report from Galveston this morning?

AVmaster's picture

"Far from recovery" 


For who? Big oil/Arab checkbook? <--- who gives a flying fuck... They want to kill us anyways... Low oil prices is good for less terrorist financial support...


So piss off...

innertrader's picture

WONDER how long it will be before the average person doesn't even know who Vince Foster was?  Or are we already there?

Isn't it amazing how many people the Clintons have had killed and the money they have stolen, yet there they are!!!!!



innertrader's picture

I would truly like to see the financials that support your statement.

Dragon HAwk's picture

Print More Storage Tanks.  easy peasy


VinceFostersGhost's picture



Genius........RIGHT THERE!!!

orangegeek's picture

Historically, oil is a $15 - $30 commodity.


The CRB is about 185 - March 2009 was near 200.


Oil remains up because CBs have it bid - markets, bonds, oil/gasoline and beef (of all things) - commodities that affect the masses - they see these prices every day.


The masses don't see barley, soybeans or wheat prices in their everyday, so these tanked a long time ago.


The game is big fat fucking goobmint creating inflation with higher taxes and oligpolies driving up sale prices in the face of....wait for it.....anaemic demand.


So much bullshit - from macros to climate change to fake wars.



Now who wants to buy a Subway franchise??? LMFAO!!!

VinceFostersGhost's picture



March 2009 was near 200.


Yeah....let's talk about that.


So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.

Is-Be's picture

Put down your rearview mirror. We must peer into the foggy future. Blaming government is a copout, a substitute for thinking.

This isn't about your ideals


Stan522's picture

This article counters the one I read last week on ZH that stated Saudi Arabia has increased production...

So, what is the truth this week.....? It keeps changing.

Is-Be's picture

Ghawar has a water cut. That's all you need to know.

Gohigher's picture

+ 100 for knowing what a water cut is ......

Who the fuck downvoted this ?

Sick Monkey's picture

This is a secondary issue. Nothing that happens here will have any bearing on rebooting a terminally flawed global monetary system. Everything has to collapse to zero first. Oil inventories will not be relevant again unless your planning a major war. Jeeps, tanks, solid fuel prepulsion, electricity, heat, etc...The usual five year testosterone induced mud fligging contest turn a blind eye to human dignity. The usual. 

Is-Be's picture

Money is an abstraction. Oil is not.

We convert 10 units of oil energy into 1 unit of food energy. This has enabled the world's population to double and then double again in my lifetime.

And Ghawar has a water cut


LawsofPhysics's picture

Oil "prices"...  priced in what exactly?

Ask yourself one question; "is oil a useful thing?

aside from that, taking about "prices" in the absence of a mechanism for true price discovery is a fool's errand.

Is-Be's picture

"Price discovery?"

What you will discover is how nutritious humans aren't. The model lmaking left brain is full of its own importance.

Joe Sichs Pach's picture

You post this frequently.


What's the solution, in your eyes, of the required "mechanism for true price discovery"?

FringeImaginigs's picture

Ahhha  "true price discovery."  That elusive imaginary unsbustantiated theoretical concept that somehow became the fundamental of all capitalism.  So ask yourself what you think a barrel is worth. Go on make your calcuations. See if you have any basis for forming an opinion. Then you can compare it with the price in the market.  After that there are only two question to ask: 1 do you really believe what you calculated or is it all just more BS. 2. do u have the balls to put your money where you mouth is.  

innertrader's picture

ALL I KNOW is that in my area, the oil companies that bought mineral rights with provisions that they must drill within 5 years or they loose the lease.  Therefore, deep wells are being drilled while it's cheaper AND to keep from loosing the lease, they have already paid for, even if they don't start production via fracking.  Therefore, we still have new production coming in within the U.S.A. and we have wells drilled waiting to start production.

Since this is the situation in my area, I have to assume it's the same in other areas within the USA.



Is-Be's picture

What I am hearing is that the only winner is the tax department.

Free money was channelled through the "oil companies" to the taxman.

The FED should have just given it to the taxman. But I suppose they have to keep up appearances.

Cutter's picture

Why does any of this matter?  Tesla is going to put oil out of business, isn't it?  Buy, buy, buy. :)

Indelible Scars's picture

So, if the price isn't what they want they pretend to not have any? Got it!

MrNoItAll's picture

The oil markets will NEVER recover, not to their long past glory days.  The Age of Oil is on a rapid slide into the history books.  Oh, sure, there will still be plenty of oil left in the ground, we'll never run out of that.  But what good is it when you have to put a barrel's worth of energy into extracting and processing the same barrel's worth of energy.  There isn't enough "net" energy left over to power the global economy and maintain infrustructure, much less build more.  We are very close to that point now.  Disaster on an epic and historic scale is fast approaching.  We're just in the warm-up phase right now.  If you look around and see everything going to hell -- markets, industry, politics, jobs, everything! -- then rest assured you are observing reality despite what the happy-talk mass media keeps spewing out 24/7.