Oil Prices Will Fall: A Lesson in Gravity

The oil price collapse is not over yet.  It is more likely that Brent price could fall back into the mid-$50 range than that it will continue to rise toward $70 per barrel.  

That is because oil prices have risen based on sentiment alone. The fundamentals of supply and demand indicate a dismal reality: oil prices will fall and may fall hard in the near term.  

Our present situation is like that of the cartoon character Wile E. Coyote.  He routinely ran off of a cliff and as long as he didn’t look down, everything was fine.  But as soon as he looked down and saw that there was no ground beneath him, he fell.  Hope and momentum cannot overcome gravity. 

Figure 1. Wile E. Coyote cartoons.  Sources:  The Braiser, Dubsisms and Forbes.

Neither can ignoring the data.

When I look down from $60 WTI and almost $68 Brent, I see no support except sentiment. Like Wile E. Coyote, we need a gravity lesson about oil prices.  What goes up for no reason, will come down sooner than later and it may fall hard.

Let’s examine the facts.

The principal reason for the oil-price collapse is a production surplus–more supply than demand for oil. The latest data from EIA (Figure 2) indicates that the surplus is the greatest since the current oil-price collapse began. In other words, the cause of the price collapse is getting worse, not better!

Chart_Prod Surplus or Deficit_May 2015
Figure 2. World liquids production surplus or deficit (production minus consumption), January 2011-April 2015. Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)

The latest data from IEA indicates that the production surplus in first quarter of 2015 is the greatest of the last decade and much greater than during the 4 previous quarters (Figure 3).

Chart_Surplus-Deficit 06-15
Figure 3. Quarterly world liquids production surplus or deficit (production minus consumption), 2006-2015. Source: IEA and Labyrinth Consulting Services, Inc.
(click image to enlarge)

With data like this from EIA and IEA, how can anyone be optimistic that even higher oil prices may be coming? How can anyone say that the price increase in recent months has any relationship to reality whatsoever?

Both IEA and OPEC offered grave concerns about persistent over-supply in their recent monthly reports that seem to have been ignored or dismissed in the jubilance of higher oil prices.

Analysts may be hopeful that the drop in U.S. rig counts–which has almost stopped in the last two weeks–will result in a decrease in tight oil production.  I believe that is true but the U.S. is not the world and the world continues to add production.

With somewhat higher prices, some tight oil producers like EOG say they are ready to aggressively grow production again if prices stabilize around $65 per barrel. If other producers do the same, so much for the as-yet-to-be seen production decline from lower rig counts.

Many point to signs of increased oil demand because of low product prices as a positive trend. I agree but as long as production is growing faster than consumption, we have an over-supply problem.

I hope that the rebound in oil prices over the past two months is sustainable and that prices continue to rise. But hope doesn’t count much for very long in global markets.  The data so far says that the problem that moved prices to almost $40 per barrel in January has only gotten worse. That means that recent gains may vanish and old lows might be replaced by lower lows.  

Wile E. Coyote never learned the lesson of gravity but that was in a cartoon. This is real.


  • sani muhammed isah

    Your assumption of what. Goes up must surely come down shouldn’t be applicable to oil price bcos it is capital intensive busness and almost every part of the Global world is involed I looked into your facts and I saw where u got your aumption from. It is true that over suply can cause the price of oil to fall and the same time global economic activities on the other side can rise the price of oil. Economic activities are very slow in some part of the developing countries like nigeria bcos we just went true a transition and soon there will be change of government wich we expect economic activities to resume if not more than the previous government. I strongly not believe that in the case of oil price volatility the assumption of what goes up must come down will old water. Thank you sir

  • I can’t understand why there was a production surplus in 2006. Saudi production declined from 2005 until mid 2007 as predicted by Matt Simmons, albeit at lower rates. Nevertheless, that pushed up prices.

    Did Katrina hide the real peak in world oil production?

    In 2Q 2008, there was an extra demand of 800 kb/d from China for the Olympic Games

    • Arthur Berman


      The production surplus in 2004-2006 has troubled me also. It seems that was the break-out period for deep-water production that was based on expectation of higher prices partly because of peak oil concerns.

      Thanks for your comment,


  • Art,

    Another excellent article. Your two charts puts the current supply-demand situation into proper perspective. Going by your long-term Fed Funds rate vs the price of oil chart (I believe since the 1970’s), there’s a clear correlation between the Fed Funds rate and the price of oil… that is, until 2008.

    According to my work in the financial-precious metal industry, it seems as if the market-making price mechanism kind of broke after the investment banking and housing industry collapsed in 2008. I actually believe a good percentage of Americans could not afford expensive shale oil if it wasn’t for the tremendous amount of QE and monetary liquidity put forth by the Fed since 2008. Basically, the Fed’s actions have inadvertently propped up the U.S. shale oil industry and the ability for Americans to afford it.

    Quick question. If we do see a $40 price of oil again due to the fundamentals, I would imagine this would severely impact the companies producing tight oil considerably (Q1 2015 was a real mess). Could this have a negative impact on tight oil production in the latter part of 2015 if these companies cannot access capital as they have in the past?

    At some point, won’t the increasing amount of debt in the Shale oil and gas industry have serious consequences going forward?


    • Arthur Berman


      Your question has been asked since the shale production phenomenon began in earnest after the 2008 financial collapse. There always has been more capital thanks to the absence of other relatively secure “high-yield” investment opportunities in a zero-interest rate world.

      At some point, the unsustainable debt and negative cash flow will catch up with many of the worst-performing E&P companies but I cannot begin to guess when. Smart people made similar observations about the real estate bubble and yet the madness continued for years.

      Low price for some extended period of time will profoundly affect tight oil production. The respite from low prices may result in a resurgence of production that will, in turn, cause lower prices later on. The developments over the weekend in Iraq may support higher oil prices irrespective of fundamentals.

      Thanks for your comments,


  • Oil prices rose on Monday after the Islamic State captured Ramadi, raising fears of deeper turmoil in the oil-producing country. Brent for July delivery was trading at around $67 a barrel this morning.


    • Arthur Berman


      Thanks for the update.

      Geopolitical risk premiums have been largely absent during the present oil-price collapse and that has been a partial explanation by some for why the effect of this production surplus has been so profound compared with previous surplus events.

      I believe that the difference has more to do with the almost 3 years of real oil prices of more than $90 per barrel that preceded the collapse last year.


  • gassnx

    I am disappointed. A.B. normally does analysis first and then write about trends, conclusions, etc. This article lacks fundamental understanding and assembly of numerous factors contributing to conclusions and forecasts. A.B. took the easy way out and sited EIA, IEA, and OPEC. It is well known that those institutions are more wrong than right. Especially OPEC that just say anything to advance their hidden policy but lacking reality.

    “….. and the world continues to add production.” A,B. has written often on the decline of world production that is 5% per year. What was A.B. thinking writing such crap blending in with those issued by the WSJ, Bank of America, Bloomberg, etc.

    It is evident that crude oil production is declining since otherwise the Majors would not look at the Arctic and the deep sea for oil production.

    • Arthur Berman


      Sorry to disappoint you but there is an important discriminator necessary to understand peak oil: the world is not running out of oil; it is running out of cheap oil.

      Tight oil, oil sands, deep-water oil and Arctic oil are all expensive oil. Conventional oil production peaked in 2005 and is declining but overall production is increasing for now. You may disagree with that on ideological grounds but those are the facts as we know them.

      Your mistrust of EIA, IEA and OPEC is noted but if we throw away data for whatever reason, we are then having a discussion about belief. I am not in the belief business when it comes to oil and gas so I will use the data that is available.

      All the best,


  • Don Westlund

    Hi Art,

    Thanks for the work you put into this blog.

    I really appreciate the information.

    I guess the question is….Do you believe the EIA??

    Here are some comments from Energy Aspects(energy research firm out of London).

    “Prices and time spreads of both Brent and Dubai have improved materially over the last month, even though not all quarters of the physical market have improved, and despite huge implied Q1 15 stockbuilds from key agencies. So, reconciling the two is increasingly hard.”

    “Yet, although the IEA for instance is showing stockbuilds of 2 mb/d in Q1 15, and continues to point to similar builds for Q2 15, reported stocking was far smaller at just 0.4 mb/d, while about 0.1 mb/d of oil came out of floating storage. So, 1.7 mb/d of builds were unaccounted for.”

    “Clearly, some of these stockbuilds have been tertiary and some have gone into Chinese storage, given NDRC’s mandate of increasing forward cover. But there is little doubt many are overrating stockbuilds, probably via a combination of incorrectly estimating both demand and supplies.”

    Another comment(which Jeffery Brown continues to highlight) about crude quality

    “While not doubting that actual stockbuilds have been over 1 mb/d, we wonder if the builds have been in the right quality of crude, which is what benchmarks ultimately reflect. The crude market’s growing condensate output and the diesel market’s high heating oil stocks (instead of ULSD) could mean builds in on-spec material has been far less than implied stockbuilds.”


  • Greg

    Are you with Goldman now? You shorting the oils? Since when does the market value something solely on the current picture of today’s supply & demand, without an eye for what’s coming next?

    • Arthur Berman

      Greg and Don,

      I offer this response to your comments so you can understand better my intent and purpose in these posts.

      I am a petroleum geologist. I spend most of my time interpreting subsurface and seismic data for my exploration and production clients. I also do geological evaluations for some clients outside of E&P as well as some speaking at investment and industry conferences, and at professional society meetings.

      I write the posts on this website in addition to my professional work out of an interest and fascination that comes from a lifetime in the oil and gas industry. I am not a professional analyst. I use only publicly available data and offer my perspectives and opinions from a fairly high level.

      I am not shorting oil in this post nor am I offering advice. I am merely stating what I see based on the data available to me.

      I have concerns about what IEA, EIA, OPEC and other groups report but it is what I have to work with. That data indicates that there is a production surplus that is getting worse and not better. I appreciate the additional information that you bring to this conversation about spreads, builds and crude oil quality although this is beyond my scope in this blog.

      I hope that this is helpful.

      All the best,


  • John


    The big picture I get, partly from reading your past postings, is that we got to this state, where oil prices were high and tight oil represents 4-5 mbd of production, because OPEC and other conventional oil producers were unable to meet the world’s demand. Now, as the U.S. oil production is peaking, the rest of the world, lead by the Saudis, are ramping up their production. As you said so many times in the past, geology will trump technology, or in this case national interest of the Saudis.
    I guess the question is, while the Saudis may have a couple of mbd of excess capacity to bring online, how long can they offset the decline in the rest of the conventional oil production due to geology and the increased demand due to lower oil prices. Since the marginal production for the tight oil is at least about $75, what if we cut the tight oil production in half to 2 mbd as the rig count and well completion would indicate. Certainly, six months to a year from now, production cannot defy the gravity of the rig counts and well completion data.
    Also, as a soft factor, the Saudis, unlike the U.S. tight oil crowd, can act with purpose, I don’t believe it is in their interest to drive the oil price back to the $40’s. I do believe they might try to keep the prices at current level. The big question is, do they have the means?


    • Arthur Berman


      Saudi Arabia has approximately 270 billion barrels of proven reserves. The U.S. has 37 billion barrels, 10 billion barrels of which is tight oil (EIA 2013).

      I believe that Saudi Arabia’s main goals are to maximize market share, to re-start global demand for oil, and to make cheap oil preferable to expensive oil (tight oil, oil sands, deep water, etc.) and to renewable and alternative forms of energy to the extent possible (see Allen Brooks’ Musings From the Oil Patch for more detail). Saudi Arabia knows that there are limits to all of these objectives and a few additional percent of market share and demand would be big wins for them.

      The current oil-price slump will discover the true marginal cost of U.S. tight oil production. The IEA OMR suggests that Russia, Brazil China, Vietnam and Malaysia increased production in April several hundred thousand barrels per day–far more than any projected decrease in U.S. tight oil production. So, a U.S. production drop is only part of the global supply story.

      I agree that the Saudis don’t want oil prices any lower than necessary to make their point and further their objectives. But, they are not in control of anything other than their own production. The market will move according to its own dynamics.

      The point of this post is that, if the current oil price overshoots market fundamentals, the correction (when and if it comes) may be more than anyone wants. At the same time, we know that today’s markets are not really determined by fundamentals but by computer robots. So, are we wasting our time trying to understand supply and demand? I don’t think so. The bots may rule the minutes but market balancing must rule the day or at least the year.

      Thanks for your comments,


  • A potentially significant non-consumption oil “sink” is the Chinese Strategic Petroleum Reserve, which is largely secret – except China aspires to store 100 days of oil imports. Unlike the USA, China stores their oil in above ground oil tanks, and China certainly knows how to build “things” fast.

    However, 2 million b/day dwarfs even the Chinese ability to transport and store oil reserves, in addition to their current consumption. And even, say, filling the Chinese SPR at 600,000 b/day would meet the 100 day goal in slightly more than a couple of years (given the oil already stored).

  • US overestimates oil production – top analyst says
    7 days ago

    A prominent oil analyst has fired a broadside at the body charged with data collection on the US oil industry, saying it has probably overestimated the country’s crude output by as much as 1.6m barrels a day.

    Philip Verleger, an independent energy economist, claims the US Energy Information Agency (EIA) has “drastically” overestimated US oil production because it uses outdated techniques rather than data from the field, ** reports Neil Hume, FT Commodities editor, in London.**

    Mr Verleger said in a report published on Monday:

    This is a large variance that could have enormous implications for the global economy. Prices will be higher because the [supply] glut was phantom. Federal Reserve policy could easily have been different had the error been understood.

    The EIA, which acts as the statistical arm of the Department of Energy, declined to comment.

    Mr Verleger, who runs consulting firm PKVerleger and advised both President Gerald Ford and Jimmy Carter administrations on economic and energy policy, was one of the few analysts bearish on oil before last year’s dramatic collapse in prices.

    Last week he forecast a further decline in prices, which have rallied sharply since reaching $40 a barrel in January.

    On Monday, Brent, the international marker, was trading at $65 and the US equivalent, West Texas Intermediate, was at $59.50.

    Mr Verleger said in his report:

    The rise in oil prices… has baffled many who believed global stocks were surging. Global stocks would have done so had the numbers been correct.

    Analysts say investors should be careful how they interpret US production statistics, in particular the EIA’s weekly short-term supply numbers. This is because they are based largely on modelled estimates, not hard supply data from the field.

    In a recent analysis of historical estimates against lagged production data, Citi found short-term EIA forecasts underestimated final data by as much as 200,000 b/d over the last year.

    Mr Verleger has come to different conclusion but says the EIA’s reliance on estimates and “failure” to make contemporaneous accuracy checks of its numbers is a “dereliction” of responsibility on the EIA’s part.


    Your conclusion that oil prices will fall because of a near 2 million b/d surplus is mistaken if the EIA/IEA data is wrong. Verleger says the data is very wrong:

    He said in the report:

    Rarely if ever had a US agency charged with collecting data made a miscue of this magnitude. The EIA administrator should be dismissed immediately for gross incompetency.

    • Arthur Berman


      Verleger issued a correction on Tuesday.

      “This evidence is clear. However, our error has confused the issue. We apologize.”

      “Economists at the Federal Reserve examined our comments in yesterday’s Notes at the Margin and pointed out an error. The effect of the error is to change the sign of the Energy Information Administration’s mis-calculation of US crude oil production. It turns out that EIA is underestimating US oil output.”

      Verleger’s fall-back position appears to be that the forward curve never lies. Good luck with that one. Check the volume of trades beyond prompt months.

      OK, anyone can make a mistake.

      All the best,


  • Brandon


    Isn’t the general belief that shale oil production will soon peak and decline corresponding to the decline in rig count. I’ve heard estimates that there is about a 6-9 months lag between the decline in rig count and the decline in completions. The subsequent production response should be steep for two main factors, the slope of the decline in rig count is the steepest in history, and the production decline rates of shale oil are steeper than conventional oil. I believe that is what the oil market is reflecting- that we may quickly go from an oversupply to an under supply.

    I would love to hear your take since you have documented the steepness of the shale decline curves in great detail.

    Appreciate the blog and your analysis.



    • Arthur Berman


      The lag between well spud and first production for the Bakken is 5 months and for the Eagle Ford and Permian, is 3 months based on some detailed studies that I did recently.

      The problem is that there is no clear response relationship that I can find between rig count and number of new well completions, not is there a clear correlation between the known number of well completions and the resulting production change. This is all quite disconcerting and I have considered publishing it but fear that it is too complicated and technical for my readers’ patience.

      For now, the main factor in production decline is the low number of well completions–please see my post “The U.S. Production Decline Has Begun.” The effects of rig count decline will be masked by this and companies are choosing not to complete wells either because of poor economics (for companies with strong balance sheets) or because they don’t have the cash (for the rest of the companies).

      The annual production decline rate for the Bakken is 35% (3% per month); the Eagle Ford is 24% (2% per month); and the Permian is 29% (2.5% per month).

      The production decline for these 3 main tight oil plays will be approximately 550,000 bopd based on well completions. My earlier and greater projection based on rig count used the EIA drilling productivity report barrels per rig that I have since found to be incorrect (my comments above about the poor correlation between rig count and well completions, etc.).

      Because the U.S. is a net importer of oil and has been since World War II to some extent, the loss of half a million barrels of production per day simply means that we must import a bit more but it doesn’t put us into a situation that is different from how things have been for many decades. Similarly, this amount of reduced production should help the global production surplus but it won’t fix it.

      EIA estimates that the production surplus is now 2.3 mmbpd and IEA, 1.95 mmbpd. Back in February when EIA estimated the surplus at 0.68 mmbpd, it would have made a huge difference but now the surplus has grown and other countries are contributing more than the current U.S. reduction, notably Saudi Arabia, Russia, Brazil and China.

      So, the situation is complex and has gotten worse and that is the point of this post. I am not sounding any alarms or advising how people should invest but am simply stating the facts as I see them based on publicly available data (that, admittedly, may be flawed but it’s what I have to work with).

      Goldman Sachs released a statement yesterday that echoed what I wrote Sunday night:

      “We find that the global market imbalances are in fact not solved and believe that the rally will prove self-defeating as it undermines the nascent rebalancing,” the bank said in an overnight report that reiterated its downward revision of long-term oil prices on Monday.

      Goldman said the ongoing oversupply, upside to U.S. production at current prices and excess capital access would be the main drivers pulling down prices.

      “Our supply and demand balance points to a still well oversupplied market through 2016 despite the perception of improving fundamentals,” it added.”

      I hope that I have addressed your questions.

      All the best,


  • Tom Human

    With resources like petrochemicals where there is only a finite supply that is steadily consumed, there is a point in the future where the prices will never go down again. Before that point, we’re playing out the Paradox of the Unexpected Hanging: the commodity might be cheap now but at some point before we actually run out, people will realize that we are close to being close to running out and the price will rise.

    Given that states’ predictions of their petro-reserves have been wildly inaccurate in the past, it’s hard however to predict whether this point is two days, two years or two centuries from now – but it will inevitably come.

    • Arthur Berman


      Price cycling dominates the onset of resource scarcity. As scarcity is perceived, prices increase beyond the high-cost producer’s marginal cost. Then, either over-supply, demand destruction or both occur driving price down–that is what drove the current oil-price collapse. At some point, supply moves into deficit repeating the cycle.

      Once price cycling is an established pattern, investment is delayed because of uncertainty. This accentuates the amplitude and frequency of future price cycles.

      Instead of price “never going down again,” it will, in fact, both fall lower and rise higher than in previous periods as the limits of supply are approached.

      Thanks for your comments,


  • Tom Human

    “it will, in fact, both fall lower and rise higher than in previous periods as the limits of supply are approached.”

    This seems unintuitive. Can you give me an example of commodities that became cheaper as the supply ran out? I’m not talking about a monotone increase, of course, but it’s very hard to imagine that as petrochemicals run out, we’ll still sometimes see $58 barrels of oil.

    Why would a rational economic participant sell a scarce commodity cheaply, knowing it would inevitably get more expensive in a limited time horizon?

    • Arthur Berman


      I recommend James Kenneth Galbraith’s The End of Normal: The Great Crisis and the Future of Growth. He has an entire section on price cycling.

      But to answer your last question, why is anyone selling crude oil in the present depressed market? Because they need cash now. The forward curve on oil (not that anyone should use it as a price forecast tool) indicates that it becomes more valuable at every month in the future. Those who can afford to are storing oil for the reason that you correctly suggest. Those who cannot afford to are selling oil.

      By the way, petrochemicals are chemical compounds derived from petroleum like ethylene and benzene.


  • Mark

    I just found this article… I wish I had read it in May. Your recent “glimmer of hope” article is the best I’ve found that sums up the current situation. Thanks for your work on this.

    • Arthur Berman


      Much about the current oil-price situation has seemed obvious for some time from a fundamentals basis. Markets, however, respond to lots of factors some of which lack substance. Eventually, markets come back to fundamentals but often after all other approaches have failed.

      All the best,


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