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Oil Oversupply – How long will it last?

News of Oil stored on ships (floating storage) puts more downward pressure on oil prices in the short-term.  In addition, onshore oil storage are at all times highs, Chinese demand has fallen plus the Saudi decision to keep pumping oil ensure that for the time being oil supply remains higher than demand.

Futures markets are in a condition known as contango.  In short, this is telling producers to store oil since futures prices are higher than spot prices.  In essence, oil producers are paid to store oil.  The futures curve is upward sloping.

In times of high demand for oil, the futures curve flips towards a condition known as backwardation in which spot prices are higher than futures prices.  In short, the oil producers are not paid to store oil but to bring it to market.  For example, this was the case right before the 2007-2008 crash when spot prices rose to $140 per barrel plus.

Not likely to occur any time soon, except if there is severe geo-political tensions.

The low price has resulted in the shelving of numerous oil projects and it has effected high cost oil production areas such as offshore oil (North Sea), Shale Producers in the US and the oil sands in Alberta, Canada.

There are several key upcoming events that could change all this and perhaps boost prices.

  1. The December 4th OPEC Meeting in Vienna: will the Saudis cut production?
  2. If demand picks up in 2016, it will take some time for North American projects to start up thus prices could spike. This will over time rebalance the supply demand picture.
  3. The Chinese economy may have hit bottom and the stimulus package will surprise to the upside.
  4. The geo-political risk premium is no longer there. In the past, this accounted for $10 to $20 a barrel.

My forecast is for prices to rise in 2016 and there is a good chance they will spike at some point.  We could see $70 to $80 per barrel for a short period of time before it settles in the $50 to $60 range.


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