This is the rainy season in much of the tropical portion of the Western Hemisphere and after a frantic and busy day in a major oil-producing country I have enjoyed a candlelight and wine dinner under a palapa in a major downpour. This is in an environment characterized by fifty shades of green with brightly colored blossoms and birds but the major feature now is rain as only the tropics can provide: Lightning, thunder, and water as if it is coming down from a firehose; strong, warm, and unremitting.
The oil news today is much like that of the last several months. Conflicting commentary and speculation as the the size and nature of The Glut. Minor and questionable data are subjected to microscopic analysis to determine: Are we post-peak Glut yet? Where is The Glut? When will the oil price go back up?
The first thing noticeable about this Glut is that it is so small. Perhaps that is why it is so hard to find, describe, and analyze. Most estimates of worldwide production overcapacity last year were in the range of 1.4 to 1.8 million barrels per day – in a market of about 95 million barrels per day – or about 1.5% at its peak. We seem now to be in a post-Peak-Glut situation but no one is sure. I am skeptical the data are accurate within 1.5% so trying to find and describe such a mini-glut with such data seems futile.
General commentary regarding The Glut seems to have recognized the production capacity glut was small and is getting smaller to the point of disappearing. Glut concerns have now shifted to the amount of oil in storage. Concerns about The Storage Glut are somewhat frustrated by the fact that we do not know how much oil is in storage. A second concern is the amount of storage used for crude oil and the amount used for refined products. OECD countries report storage volumes, with some accuracy, but Russia, China, third-world countries, and various oil-trading organizations see no reason to report how much oil or refined products they have in storage or where and many reasons not to – and they have more than half the world’s stored oil.
So the oil market is in a volatile situation in which reported small changes of production rates and storage volumes have exaggerated effects on quoted oil prices. Some of those reports, not many but some, may be accurate but the market is also responding to rumors, lies, errors, hallucinations, and wishful thinking. The usual suspects are blamed for this situation: Rupert Murdoch, the Koch Brothers, Jews, Big Oil in the form of Exxon Mobil, bankers, frackers, and Greenhouse Gases.
An odd aspect of the current Storage Glut is that even with large surplus storage, imports to the US are increasing. Something does not add up; not unusual in this market.
The current oil price downturn is associated with the smallest production overcapacity of any downturn since the Second World War. The fact that it was triggered by the end of Quantitative Easing by the Federal Reserve and then stimulated by the Saudi decision to maintain market share can explain the large price effects of a mini-glut. Small variations of supply and demand can cause extreme market price variations in marginal pricing systems with small contract sizes. Likewise, once demand equals production capacity through either demand growth or production decline a large increase of price can be expected quickly as we swing to production undercapacity and buyers bid the price up.
No other commodity is so involved with geopolitics or so intertwined with the financial markets as oil. To expect clarity with respect to reporting of strategic information is unrealistic. Therefore we must make do with what we have and marinate that with experience and that indicates that the oil price will be volatile as supply and demand are roughly in balance but as demand increases and supply declines we can expect upward pressure on prices. The suddenness of the price rise will be somewhat tempered as excess storage is drawn down over an extended period; owners of stored oil will not want to sell too soon – they will wait to take advantage of as much price increase as they can. When they think the rate of increase is less than the storage cost, they will sell – gradually so as not to kill their own market.