The Oil Glut Grows by Guest Blogger Buck Klemkosky

The International Energy Agency (IEA) has estimated that crude oil inventories have swollen to 3 billion barrels, the highest level on record, representing more than a one-month global supply. Many oil tankers, typically used to deliver oil, have been converted to floating storage with more than 100 million barrels of crude oil sitting in tankers offshore as the oil glut fills on-land storage to near capacity. The economics of storing oil for future delivery is no longer profitable as storage rates have increased dramatically, meaning some of the 3 billion barrels will be taken out of storage in 2016 and 2017. In addition, the U.S. strategic petroleum reserve is at its 720 million barrel capacity as well as China’s and other countries.

The oil glut has grown because supply exceeds demand by approximately 2 million barrels per day (b/d), 96.5 million b/d of supply versus 94.5 million b/d of demand. This is due more to supply increases than demand. Most major oil-producing countries have ramped up production including Russia, Saudi Arabia, Iraq, Iran and several others. Meanwhile, oil production in the U.S. has proven more resilient than expected although its 9.2 million b/d production is expected to decrease in 2016 but not significantly enough to offset increased supply from other countries, especially Iran as economic sanctions have recently been lifted. The growth of oil demand has increased by 1% annually over the last decade and growth is not expected to increase going forward. Much of the increased demand has come from China and other developing countries but their economic growth has slowed dramatically. Peak demand is now of more concern than peak supply.

The fall of oil prices (West Texas Intermediate) to less than $40 in 2015 will have repercussions for the U.S., some positive and some negative. The energy industry was the big driver of employment growth and corporate investment since the Great Recession of 2007-2009. Already $200b of global projects have been cancelled or delayed and more than 250,000 workers have been laid off. Two-thirds of the oil rigs in the U.S. have been taken out of service. The Keystone XL pipeline has been vetoed but that will not have much impact as the U.S. already imports 3.4 million b/d of oil from Canada out of 9.5 million b/d total. Overall lower oil prices will be a plus for importing countries such as the U.S. as lower gasoline and fuel prices put more money in consumer pockets. The real hurt will be felt by the major oil-producing countries and companies as all of the OPEC countries, including Saudi Arabia, are facing huge fiscal deficits. Forty North American exploration and production companies have already declared bankruptcy with more to come.

It is difficult to predict oil prices but the IEA estimates that the best-case scenario for oil prices is $80 per barrel by 2020 and the worst case is $50 per barrel. Geopolitical instability in the Middle East is always a possibility and Saudi Arabia has recently stated it would like to see oil stabilized at a higher price. But Saudi Arabia has not committed to cutting production to balance supply and demand which has been its role for several decades. If low oil prices are the new normal, the U.S. will be a net positive beneficiary as consumers will enjoy lower energy prices for several more years.