Oil Fundamentals Improve But Inventories Will Keep Prices Low

Global oil supply and demand fundamentals moved in the right direction in September but surplus inventory will keep oil prices low for some time to come.

EIA’s September 2015 STEO (Short Term Energy Outlook) reported lower world liquids production and higher consumption but out-sized inventories remain a major obstacle to near-term oil-price recovery.

Crude oil stocks are the fundamental driver of oil prices and U.S. inventories are more than 100 million barrels above the 5-year average and more than 90 million barrels above the 5-year maximum (Figure 1).

Chart_Inventory & 5 YR MAX-MIN
Figure 1. U.S. crude oil stocks showing the 5-year average range and 2015 stocks to date.
Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)

OECD stocks are similarly over-supplied and any discussion of higher oil prices is irrelevant until world production declines enough to begin working through inventory volumes.

That is not happening yet.

The latest data from EIA suggests significant improvement in fundamentals of supply and demand although one month does not make a trend. Global liquids supply decreased 560,000 bpd and consumption increased 680,000 bpd in September (Figure 2). The relative production surplus declined 1.24 million bpd but over-supply is still 1.16 million bpd.


Figure 2. World liquids production, consumption and relative surplus or deficit.
Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)

U.S. crude oil production decreased 120,000 bpd in September compared to August and has declined 465,000 bpd since April, 2015 (Figure 3).

Chart_US Prod_Oct 2015
Figure 3. U.S. crude oil production. Source: EIA and Labyrinth Consulting Services, Inc.
(click image to enlarge)

Oil futures prices have rallied $2 per barrel so far today on this news but the hard reality is that the world still has too much oil supply.

Figure 4 shows a strong correlation between year-over-year inventory levels and oil price. U.S. comparative inventories are the highest in history. The oil-price collapse of 2014-2015 is proportional to the magnitude of the current inventory surplus.

Chart_Crude Oil CI & CPI WTI

Figure 4. U.S. crude oil comparative inventory, CPI-adjusted (consumer price index) WTI price since 1987 and M1 Money Supply.
Source: EIA, U.S. Bureau of Labor Statistics, St. Louis Federal Reserve Bank and Labyrinth Consulting Services, Inc.
(click image to enlarge)

This follows the longest period of high oil prices in history (red shaded area in Figure 4). Oil prices exceeded $90 per barrel for 47 months between November 2010 and September 2014. This lead to increased investment in oil and gas thanks in part to the expansion of money supply also shown in Figure 4. The resulting over-production is why inventories are bloated and why oil prices collapsed in 2014 and remain near $50 per barrel today.

It is also why oil prices will not move significantly higher despite good news about supply and demand fundamentals.


  • I am not sure what is meant by good news and what is bad news.

    When looking at both the world’s dependency on oil from the disintegrating Middle East and the necessity to reduce oil production to stay within 2 degrees of warming it would be good news if oil demand dropped and oil production would follow suit so that oil prices are neither too high nor too low.

    Half of oil burnable in 2000-2050 to keep us within 2 degrees warming has been used up as we hit 400 ppm

    The above article contains a graph showing that by 2020 oil production would have to be decreased by 9% pa in order to stay within the carbon budget.

    • Arthur Berman


      I understand the excellent points that you make. When I say “good news”, I am thinking about those who work in the oil industry struggling to keep their jobs and their companies viable.

      All the best,


  • Don Westlund

    Hey Art,

    Your first chart showing how out of balance U.S oil stocks are to the 5 year range. Do you know where I might find a similar chart or just the data for total global liquids(not U.S only)?


    • Arthur Berman


      That’s a difficult question and part of the reason that I only showed U.S. inventories in my chart! I made a chart of OECD inventories to support my statement that the story was similar but didn’t use it in the post.

      You can find OECD data in EIA STEO and in IEA OMR reports but the only place that I know to find stock data for the rest of the world is the JODI database and I cannot vouch for its accuracy.

      Good luck and please let me know your opinion of JODI if you use it.


  • Art,

    Excellent post, as always.

    What I find most fascinating in recent weeks is the market’s pre-occupation with U.S. production data (which are just estimates anyway) over inventory data, which I contend should be far more important.

    Last week was very telling. The market TANKED in an instant on the headline news of a big inventory build. But the sell-off only lasted as long as it took traders to get to Page 2. As soon as they saw that U.S. production was estimated to have declined by what frankly was a negligible amount, they market fully recovered the inventory-driven loss and kept right on going to the upside.

    So far as I can tell, nobody is really even paying attention to the fact that increases in foreign production more than offset both the declines that have already occurred and those that are projected to occur in U.S. production. It seems the market is just obsessed with U.S. production estimates, and inventory has taken a back seat. Today’s report of both an unexpected inventory build AND a very small increase in U.S. production sent futures tumbling!

    The reason I find this so surprising is that the U.S. production numbers are estimates with a large error factor. If the oversupply continues long enough, and the inventory builds of the last two weeks continue in earnest, we could be looking at a storage crisis (or at least the need to employ much more expensive floating storage to absorb the oversupply). But instead of focusing on how much spare storage capacity remains, it seems that U.S. production increases/decreases that frankly look to me like nothing more than noise will be what drives the market for now.


    • Arthur Berman


      The big news that I took from yesterday’s STEO was that the global liquids production surplus fell 1.24 mmbpd to half of what it was a month ago! Global demand increased .07% in a month.

      The U.S. liquids supply decrease was 32% of the world total so it was significant but not the whole story.

      I am not too concerned about a storage crisis. Total refinery and tank storage is around 612 mm barrels and we are at 460, about 75%. In April, storage reached 490 with no problem because that was only 80% of capacity.

      I think that traders get swept up in whatever is the dominant theme of the week or month and, even though they are looking at all the factors, make bets on what seems like a narrow part of the story.

      All the best,


  • David Ryan

    Art, what about nat gas and the lower production from
    associated gas? I read bloomberg articles that natural gas
    demand is up around 15 percent this year from low prices
    and switching to gas from retired coal fired plants. So how long
    until nat gas prices rise?

    • Arthur Berman


      I plan to write about natural gas in my next post.

      Gas production increased about 0.6 Bcf/day in September although it has been flat overall for the last 6 months. I don’t know where Bloomberg got the data that says demand is up by 15%. Year-over-year September consumption increased about 6%. I don’t see an obvious price increase for a few years yet. The northern U.S. is forecast to have a mild winter so that should keep gas prices relatively low.

      Thanks for your comments,


      All the best,


  • Hello Art, nice article. I wanted to get your insight into why production has not declined faster as I imagine it would do to shale oil having larger decline curves? Do you believe the lack of new oil wells being drilled ( at the previous high growth rates) will result in U.S production declining faster at an accelerated pace in the months ahead? Or do you believe rather that production will be somewhat maintained as long as shale oil companies have hope or continue to receive junk bond financing? And how do you believe the Chinese economy slowing down will effect oil prices? Looks like until we get a major bloodbath oil should keep on falling. Thank you for your insights

  • Stavros Hadjiyiannis

    Just a matter of time before the low price of oil results in decreased production worldwide. While nobody can tell for sure when the excess production will vanish, we can be certain than it is only a matter of time.

    This is due to the very simple fact that the current oil price is loss-making for many marginal projects around the globe (not just US shale and Canadian tar sands) and the oil production declines much more quickly than the production of other primary commodities.

    Moreover, the possibility that OPEC reaches some kind of compromise in the coming months is also somewhat elevated in relation to only a couple of months ago. This is probably due to the fact that the GCC/US economic war on Russia seems to have brought exactly the opposite results of what was intended (the surrender by Russia of Bashar al-Assad)

  • clueless

    Some people claim that current US oil inventory numbers cannot be compared to historical numbers. They say shale backed out oil from the Mideast and Africa, which spent about 15 days at sea, and which was only included in US inventories after it cleared US Customs. The majors included this oil into their company inventories while it was on the high seas. Now, the Bakken and Eagleford oil is essentially included in US inventories as it leaves the wellhead.
    What say you?

    • Arthur Berman


      I am clueless about how to respond to your question. I am a data guy and there are always huge uncertainties about the data but that’s what we have to work with. We can spend a lot of time playing what-if and maybe scenarios or disparaging the poor job that the data-collection organizations do. I can only work with what is offered and cannot really comment on what may also be going on until it can somehow be quantified.

      I am not trying to dodge your question but I really don’t know how to address these issues.



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