Has crude oil market found rock bottom?

Oil Drilling rig in the Arctic

There has been much in the news this past couple of weeks regarding the rising price of crude oil, and whether or not the market has seen bottom.  At Barchan, we have been considering all of these news reports and thought we would dig into some data, both positive and negative to develop an opinion as to whether this is truly market bottom, or just another potential dead cat bounce.  So what do we make of the recent rise in global oil pricing?

On the positive side, the EIA monthly production report (released on February 29, 2016) showed US crude oil production declining month over month to 9.3 mmbbl/d – a drop of 166,000 bpd.  This brings crude oil production back to the November 2014 levels and also represents the first year on year production decline since September 2011.  That is a positive indicator, isn’t it?  In addition to this, the EIA Short Term Energy Outlook from March 8, 2016 predicts that US production will continue to decline month on month through to the end of 2017.  Again, on the face of it, that is a positive indicator.  Well, let’s dig a little deeper.

A closer look at the monthly production reports from the EIA reveals that monthly production volumes have largely been declining since April 2015, and in that regard, the December report brings no surprises.  In reviewing the latest EIA storage report (March 4, 2016), we find that the overall storage for the week grew by 3.9 mmbbl from the previous week, and year on year, storage is up 73 mmbbl.  The most recent storage report puts US storage at 522 mmbbl, excluding the Strategic Petroleum Reserve.  On the face of it, this would appear to be a negative indicator to price recovery.  To really understand the crude storage number though, we need to put it into historical perspective.

A survey of refinery capacity over the years as compared to crude oil storage gives us the final piece to understand from a production and storage basis if the recent rise in crude prices is warranted. The EIA data for both refinery capacity and commercial crude oil stocks makes it apparent that the build in storage with respect to capacity actually began in 2012.  The historical average of days of refining capacity in storage was 18 for the previous decade or more (ref. EIA annual reporting 2000 – 2011).  On an annual basis, days of supply for US refinery capacity has been increasing steadily, with a significant uptick in 2015 bringing the available stock to 27 days of refinery supply – that is a full 50% higher than historical averages.  In fact, the recent additions to storage in Q1 2016 has raised that supply to 29 days.  Barchan views this as a significant negative indicator for crude oil pricing.

What do we make of the recent rise in crude oil price that has occurred over the past week or two?  Barchan refers back to a previous article (January 12, 2015) where we discussed speculation in the market place.  This is a challenging input to predict, as it is not always apparent what drives investment decisions.  Speculation drives volatility and Barchan believes that it is this volatility that we are seeing right now in the crude market.  We are once again left with a somewhat negative view of the market, and we continue to look for signs of a true recovery.

Copyright © Barchan Advisory Services Ltd. 2016


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