The Supply Side of Oil

After a brief rally at the end of January/beginning of February, oil prices are back at lows not seen since 2009 and the height of the Great Recession. With US production continuing to rise, now above 9 million barrels/day and storage volume at levels not seen in 80 years, the glut appears to continue.

The data behind the trend is quite interesting, however. Global production breaks down into three main groups: OPEC nations, Non-OPEC/Non-U.S., and the U.S. Of the three, only the U.S. is showing any sort of increase in production. OPEC was down slightly in February thanks to unrest in Libya and Iraq, and the Non-OPEC/Non-US figures are below 2014 levels. Note that the Saudi’s, with a third of OPEC production, is almost at full production and little room to compensate for further disruptions in the OPEC nations.

So the swing producer right now is the U.S.. Oil supply could change quickly, however, because of this. Active oil rigs in the U.S., the measure of future oil production in the US, is down by half in just a few months. With an inherent delay in production slowdown because of increased well efficiency, we won’t know the impact for many months.

And this does not take into account the impact of lower prices on demand.

It promises to be an interesting year for commodities. Oil prices are a wildly unpredictable dynamic… and one that will likely cause more disruptions in the financial markets this year.

 

David Matias

Managing Principal

Vodia Capital, LLC

 

Sources for data: Bloomberg.com and Cornerstone Analytics