The world is so awash in oil that it’s increasingly being stored
at sea. Because crude inventories have swollen beyond land-based
storage capacity, traders are chartering supertankers. Already some
30 million barrels of capacity has been hired—adding approximately
an extra $1 a month to storage expenses. And unusually warm weather
has helped push commercial inventories worldwide to 500 million
barrels more than what’s typical this time of year, according to PIRA
Energy Group. Some 230 million barrels of new land storage capacity
is expected to come online over the next 12 months, according to the
International Energy Agency, but the glut could continue through 2017.
A confluence of forces—a kind of perfect storm—
looks likely to push prices lower still. by Ken Stier
All of this oil is having a predictable
impact on prices—in the mid-$30s-per-
barrel range by mid-December—which
has spread pain across the oil patch.
Those surprised by the prices have
plenty of company. Ten major banks,
surveyed by the Wall Street Journal last
spring, expected a barrel of oil would
cost at least $50 in December 2015.
Futures contracts for that same month
sold for approximately $64 a year ago;
current futures contracts expect $45-
per-barrel oil in December 2016.
This oil price rout comes from a confluence of forces—from an oilman’s
perspective, a kind of perfect storm—
that looks likely to push prices lower
still and keep them there for longer
than most earlier cycles. Key has been
the collapse of demand, especially in
China, the main engine for the past decade’s super-cycle commodities boom,
but also among other developing
economies where economic growth has
been most pronounced in recent years.
On the supply side, the emergence
of the United States as a significant oil
producer due to shale technology is
another key factor. Oil production doubled in the past decade to a daily average of 9. 6 million barrels—and will
probably soon resume crude exports.
The other major factor is a divided
OPEC, with the pivotal swing producer,
Saudi Arabia, pursuing a market share
strategy; other major producers have
been compelled to follow suit or lose
market share. Unrestricted production
is a significant departure for OPEC,
which was established in 1973 with the
purpose of coordinating constrained
production (through quotas) as a means
of price support.
OPEC’s ceilings were abandoned by
the dominant members of OPEC (Saudi
Arabia and the Gulf states) so that they
could pump flat out to defend their
market share against new oil-producing
countries drawn in by high prices. Depressed prices hurt the higher-cost producers more than they do the Saudis
and their Gulf state neighbors and will
eventually force them out as they continue to lose money.