The Oil Glut Continues

It is time once again for our midseason fuel pricing report. We do two price reports each year, one right before heating season and one around this time when a number of hedging decisions are being made. I’ll reiterate the disclaimer that these pricing reports are simply for educational purposes and the fundamentals discussed can change radically between the time the interviews are conducted and the issue goes to print.

While the nuance can change, what’s becoming pleasantly repetitive is the bearish nature of these pieces:  generally, abundant supply and abundant storage leading to lower prices. This applies to both crude and refined products.  In fact, we may be at a point where we will see just how low those prices can go. On the crude front, and crude is the primary component of refined product price, oil has already dropped below $30 per barrel and some see it perhaps dropping below $20 per barrel.

While prices may spike low and perhaps stay there for some period of time, there seems to be a general analyst consensus that a realistic bottom would be perhaps in the mid-$30 per barrel range and a reasonable baseline price more long-term somewhere between $40 per barrel and $60 per barrel. Quite remarkable. It is particularly remarkable when you remember the outcry in the early 2000s when OPEC announced that it would maintain a price basket on oil in the low $20 range as the oil glut of the 1990s came to an end. Needless to say, that price basket failed to hold and prices and volatility ramped up drastically year after year.

Today’s prices are being driven primarily by Saudi Arabia in its ongoing attempt to preserve market share and damage the US shale oil production sector. It’s a battle that Saudi Arabia will lose, if it has not done so already. The country relies upon oil in the $80 per barrel range to maintain its social programs and it’s extraordinarily difficult to see a return to that price short of a full scale major regional conflict in the Middle East. Our shale production seems far more resilient by comparison.

With the sanctions lifted on Iran, a significant quantity of crude is poised to enter the marketplace. Similarly, and unfortunately, the world economy seems to be growing weaker instead of stronger, meaning that demand will not likely provide a significant price support. News out of China is particularly grim.

Chinese demand, actual and potential, has been seen among the investment set as the underlying rationale for higher oil prices. I’ve never been fully on board with that concept given the great many structural weaknesses inherent in both a centrally managed, communist structured economy, and the numerous social tensions in a country where the new billionaires coexist with a significant portion of the population that still meets its energy needs by burning animal waste. Given the global ramifications of a Chinese economic collapse, this is one case in which I really have no desire to say “I told you so.”