Growing Supplies, Weak Demand Spells Bad News for Oil Prices
A few years ago when oil prices were above $100.00 a barrel, job seekers found their way to the Bakken oil fields in North Dakota, discovering new found wealth. Low-level service jobs were paying $50,000 per year and the good times were rolling along.
But like the gold rush in the 1800s that led to the growth of California, everything eventually came to an end as we are seeing in North Dakota. While there’s plenty of fracking oil in the cracks, unless oil prices rally higher to $70.00 and above, don’t count on moving there.
The West Texas Intermediate (WTI) oil continues to face upside resistance at moves towards $50.00 per barrel when selling emerges. The near-term bottom is at around $40.00 to $42.00 per barrel with the bias favoring the downside despite the massive cut in oil rigs nationwide. Some oil bulls are staging a brave face and suggesting $70.00 and even $100.00 oil is on the horizon. They are clearly dreaming. The reality is we will likely see $30.00 oil before $70.00 oil.
Chart courtesy of www.StockCharts.com
Just take a look at the country’s rig count. The widely referenced Baker Hughes Rig Counts, a leading indicator for the fossil fuels sector, points to an industry that has seen its rig count plummet to 775 in the country as at October 30 compared to 1,929 a year earlier in Canada. The rig count has dwindled down to a mere 191 rigs from 429. (Source: North America Rig Count, Baker Hughes, last accessed November 6, 2015.)
Oil Fundamentals are Bearish
Yet despite the massive cut in oil production, the price of oil continues to be under pressure, which is not a positive sign for the long thesis.
So we have lower production and still crude inventories are on the rise. There are about 482.8 million barrels of crude in storage according to the U.S. Energy Information Agency. To make matters worse, the figure excludes crude Strategic Petroleum Reserve. The record was 490.1 million barrels in April 2015. Moreover, the current inventories are some 60% higher than the 10-year average. (Source: “Weekly Petroleum Status Report,” EIA, last accessed November 6, 2015.)
Clearly the supply side is not offsetting the sluggish demand for oil we continue to witness around the world. Especially given the stalling.
Global demand for oil is expected to decline to 95.7 million barrels per day in 2016 according to the International Energy Agency. (Source: “Oil Market Report,” IEA, October 13, 2015.)
China, the world’s second-largest consumer of oil, is struggling to find growth; meaning lower demand.
The Chinese economy expanded at 6.9% in the third quarter—the lowest reading since the first quarter of 2009. Chinese Premier Xi Jinping predicts the country will grow its economy by at least 6.5% annually until 2020. But this is highly questionable. China helped to empower the commodities supercycle, so this is bearish for oil prices.
In addition, the emerging markets in Asia and Latin America are showing cracks while the eurozone continues to face slower-than-desired economic renewal.
The eurozone is expected to see its gross domestic product (GDP) growth fall to 1.8% in 2016 from 1.9% according to the European Commission. (Source: “European Commission Cuts 2016 Eurozone Growth & Inflation Forecasts,” RTT News, November 5, 2015.)
The bottom line is the supply and demand picture is imbalance for at least the next year or two. I simply don’t see a valid case for sustainable higher oil prices at this time given the current fundamentals. The bears are firmly in the driver seat for now.