Bulging Stockpiles Curb Enthusiasm for Oil Rally – 8/2/16

Saudi Arabia and Goldman Sachs Group Inc. have decided the supply glut is over, but markets may disagree and stockpiles of product are unlikely to go dry anytime soon.

At the moment, some surprise output disruptions like those of the pipeline attacks in Nigeria or the wildfires of the Canadian oil sands have cut away some excess production. But those sorts of disruptions are quickly resolved and future disruptions cannot be counted on to balance out the fundamental supply and demand mismatch. Though smaller now, the mismatch is still a problem that will keep oil prices low as more oil is coming from suppliers than is needed by buyers.

Still, oil prices have almost doubled between February and June on declining U.S. oil production and a variety of one-off disruptions so let’s see how long they can last. Although crude production from U.S. fields has declined significantly since 2015 with at least 70 shale related firms going out of business and taking most of their output with them, inventories of crude and refined products are still bulging. The situation is not so dire as it was a few months ago, but stores are full enough to stifle demand as they begin to wind down. And if packed inventories slow a return to higher prices, then U.S. shale drillers could recover and be ready to send prices plummeting before they break $60 a barrel.

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Stockpiles of crude oil and refined products during the years of the glut are still near record highs, according to Bloomberg and the IEA

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