Gadfly: Oil's Neverending Supply Glut Story Has A Built-In Ending
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It does not necessarily reflect the views of Rigzone.
(Bloomberg Gadfly) -- This isn't the way things were supposed to be for the oil market.
Instead of seeing supply and demand rebalance and prices recover, we're sitting on the edge of a bear market.
Yet again, a glut in supply is calling the shots, and it's getting hard to see how that will change. But actually, that's just what's due to happen. Investment -- or rather, the lack of it -- is the key.
2016 had such a promising start. Whether you listened to government agencies, banks, analysts, oil companies, or the oil-producing countries you would have heard the same message -- the market will begin to rebalance in the second half and inventories will start to fall as rising demand overtakes dwindling supply. Prices could then start on a sustainable recovery.
A month into the third quarter, and the price of OPEC's basket of crudes (comprising the largest export grade from each member country) fell below $40 a barrel on Thursday for the first time since April.
We are where we are because of a decision Saudi Arabia made back in November 2014 to abandon its unofficial role as the world's swing producer. The ensuing drop in oil prices was meant to allow the low-cost OPEC producers to regain control of a market that they had lost to the U.S. shale oil industry.
The promised land was a recovery in the oil price to a more acceptable level -- although what "acceptable" might look like has always been a moveable feast.
It hasn't quite worked like that. Demand has not surged as producers had hoped, and supply has proven more resilient than expected.
Demand growth is slowing from its lofty levels earlier this year, dashing hopes that the supply will get soaked up quickly.
But the real story is the supply outlook. There's little cause for optimism here, at least in the short term. There was a ray of hope when unexpected supply disruptions over the spring and early summer of this year, most notably in Canada and Nigeria, pushed up prices. Though there's is no end in sight to Nigeria's problems, Canadian production has been all but fully restored.
And we're still seeing additional supplies from projects that were sanctioned in an era of much higher prices -- including some from the days when oil prices were even lower than they are now. ENI expects production from the troubled Kashagan field in Kazakhstan, where a final investment decision was taken in 2004, to begin by the end of the year.
The glut persists.
For the oil market, the result is a delay in the start of a long-waited rebalancing. The pickup in prices to above $50 a barrel in June looks to have been a false dawn. The price recovery is not yet here.
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