Bulging Inventories Mean Low Oil Prices for Foreseeable Future
The crude oil price continued gaining on Wednesday after Energy Information Administration (EIA) data showed a second consecutive weekly decline in U.S. oil stockpiles.
A recent report by the EIA showed that U.S. crude inventories were reduced by 1.9 million barrels last week, despite analysts having forecasted a drop of only 533,000 barrels of oil. (Source: Reuters, last accessed September 23, 2015.)
Inventory levels at the largest U.S. crude oil storage facility alone in Cushing, Oklahoma, dropped by 426,000 barrels according to the EIA data. (Source: Reuters, last accessed September 23, 2015.)
What Does This Mean for the Oil Price Forecast in 2016?
Not much, because oil prices won’t be rising any time soon. From the mainstream investment world, oil prices are forecasted to stay under $45 for the foreseeable future. We might even see crude slip back into the $30.00s in 2016 before this entire situation corrects itself.
Despite this latest optimism, total crude oil inventories in both in the U.S. and globally remain at record high levels. This latest surprise draw suggests a real movement towards an eventual market balance. Surging oil production levels and slumping demand in the last year led to the current oil price collapse. But last week’s declines in physical stockpiles indicate for some people that the oil market might indeed be correcting itself.
Refined product stockpiles did not fall, as reduced driving demand from the end of summer translated into less rubber hitting the road this last week. Gasoline inventories in the U.S. rose by 1.4 million barrels, despite an index of analysts’ expectations having forecasted only an 819,000 barrel rise. (Source: TD Waterhouse, last accessed September 23, 2015.)
Get the picture? There’s already a real, physical decline in the amount of gasoline that drivers are demanding, and that will soon translate into a drop in demand for crude oil.
Have We Come Out of the Worst of the Oil Price Collapse?
Some analysts may be pushing the bullish narrative, but it avoids the reality in which the oil price finds itself.
Then EIA data further bolstered an earlier American Petroleum Institute (API) report which showed a 3.7 million barrel reduction in U.S. crude stockpiles. (Source: MarketWatch, last accessed September 23, 2015.) This helped in part to insulate the oil price forecast from negative data concerning a Chinese manufacturing contraction.
Translation: optimistic reports based on data, which is itself based on estimations by the API and EIA, have been causing oil prices to spike here and there. But the psychological value of these reports can only do so much before real economic fundamentals take over again.
This is the point where the economic risk from China is worth mentioning.
China’s ongoing stock market crash and questions of economic collapse are dragging the country’s industrial sector into a quagmire, as data showed the biggest decline in factory output in more than six years. (Source: CNBC, last accessed September 23, 2015.) Traders and analysts alike had feared this contagion would extend the gloomy outlook of global commodity markets.
But hoping for a result doesn’t make it real.
Get Ready for Lower Oil Prices in 2016
Oil prices hit their lowest point since 2009 in August, as the crude oil price collapse which started last year continues to hammer away at energy producers.
Since then, the supply and demand imbalance has shown no serious signs of correction. We have not seen the bottom for oil prices yet. It’s definitely going to get worse before it gets better, and here’s why.
Opinions might be divided as to the trajectory of the oil price forecast, but questions remain about just where the demand will come from to meet what are still record supply levels. A drawdown in existing stocks does not translate into an actual market correction, but only slightly hints at it.
What you can expect from the oil price forecast in 2016 is that crude oil is going down again in the near term, perhaps even dipping into the $30.00s before the extreme low price pressure forces even more producers to throttle back oil production. In my view, oil prices might stay under $45 per barrel for the foreseeable future.