Market followers are divided on when global oil prices will recover to a higher plateau after tumbling to a 13-year low during the first quarter while a majority observing the US natural gas market maintain a bearish disposition, with both markets under pressure from too much supply.
In New York late April, we reviewed the global outlook for supply and demand drivers for oil, and then turned for a closely examination of the domestic market, with US crude production the critical component in not only a recovery from unsustainably low oil prices, but also in creating the oversupplied market in the first place. It was through technology that the United States upended the world oil market, with hydraulic fracturing joined with horizontal drilling pushing US crude production to the highest point since the early 1970s.
US production peaked in April 2015 at nearly 9.7 million bpd while Russia and members of the Organization of the Petroleum Exporting Countries ramped up output, with OPEC previously dropping their quota system and instead sought to expand market share. Russia is producing near a post-Soviet high, and OPEC production continues to grow in early 2016, with Iran one driver, expanding output following the end of sanctions in January.
The new supply overwhelmed demand, with inventory held by the 34-country members that make up the Organization for Economic Cooperation and Development beginning the year with a record 350 million bbl overhang, and forecast to add another 285 million bbl of oil to their stockpiles through 2016. US commercial crude inventory has surged to its highest level since 1929 at more than 540 million bbl in April, and that doesn't include another nearly 700 million bbl of oil held in the country's Strategic Petroleum Reserve.
Low prices and a falling unemployment rate pushed US gasoline demand to a seven-year high in 2015, up 2.7% from 2014, with US refiners repeatedly producing at record monthly highs amid surplus crude supply and sharp domestic demand joined by robust exports. The United States has been a net exporter of oil products since 2011.
US gasoline demand remains strong in early 2016, and is viewed as a critical component in working to narrow the wide gulf between production and consumption. However, sluggish economic growth globally and in the United States has pressured demand for distillates--heating oil and diesel fuel.
Diesel is primarily consumed in the industrial and commercial sectors in the United States and slow economic growth including weak industrial output have sharply pressured demand. Moreover, a mild winter exacerbated weak diesel demand, with distillate supply building.
Low oil prices forced US upstream companies to slash budgets and drilling activity plunged to a better-than six-year low. US production declined, but not nearly as quickly as many had expected, capping a recovery in domestic and global oil prices. By April, US production had finally slipped below 9.0 million bpd, the first time since 2014, with the lower output rate another key component in bringing the global market into balance.
The International Energy Agency has forecast that the world supply-demand disposition would balance in late 2016, early 2017. Lower US oil production and strong gasoline demand in the US as well as in China and India lent support to this analysis, and oil prices have moved into the mid-$40s bbl, in position to test the $50 bbl psychological level.
Any upside is tempered by the market's vast oversupply, as well as contingent on demand remaining strong. There's also an expectation that if oil prices do crack through stiff technical resistance near and at $50 bbl, US oil companies would expand their drilling activity. Still, the market is positioned to test their 2015 highs above $60 bbl late in 2016, although the higher price is likely unsustainable in the short-term.
Nonetheless, the oil market has more upside potential than a bearish US natural gas market, where the same technology that drove the oversupply in crude had first pushed the domestic gas market into a supply glut. Changes in US policy regarding exports of crude and liquefied natural gas does improve the prospects for US producers longer-term, with the first US LNG shipment from the Lower 48 States taking place in February.
