Future Implications Of Oil Prices
Over the course of the past month and a half, oil prices have somewhat stabilized despite experiencing a healthy amount of day to day volatility. In late December, prices reached a short term low of $43 and have bounced back to near $50 per barrel. Despite the recent bounce, the future fundamentals in the supply/demand relationship have deteriorated. This could potentially suggest another leg lower for the price of crude oil sometime in the intermediate term future.
The first, and really only supportive element about the bounce in the price of crude oil has been that the Baker Hughes Oil Rig Count has seen domestic rigs fall by 37% since October of 2014. Rigs have been shut down so precipitously that the number of domestic rigs operating in the United States is down to levels not seen since July of 2011. The issue at hand is that rigs have become so efficient that even though there are fewer rigs operating, oil production in the U.S. is at all-time highs.
While the decrease in operating rigs does bode well for a drop in future supply coming on line at some point down the road, current production levels are still extremely elevated. Just yesterday it was reported that crude oil inventories surged for a seventh consecutive week. Inventory levels are now at an 80 year high! Companies have continued production despite the relentless drop. It’s also likely a number of projects that went online last year will cause production to steadily increase over the balance of this year.
So you have a situation where oil production is steadily increasing without a considerable uptick in demand. The main reason prices have found a floor thus far is that a healthy portion of current production is finding its way into storage facilities rather than flooding the market. Companies have been able to find a medium of how much supply to issue to the market without adversely impacting price. The major issue moving forward is that these storage facilities are filling up, and fast. Cushing, Oklahoma home to the nation’s largest oil storage facility is capable of holding over 80 million barrels of crude oil.
Companies have been stockpiling about 2.2 million barrels per week at the facility. They are waiting to sell these stockpiles until oil prices rise down the road. The issue is that the facility is approaching 55% of capacity and, at the current rate of storage increases, will be full sometime in the next three to four months. Unless other capable means of storage are identified, all this oil has nowhere to go but the open market to be sold which could ultimately be the catalyst for another leg lower in the price of oil in coming months.