How Big Really Is The Oil Glut?

December 04, 2014

We take a look at the figures.

[This article originally appeared on HardAssetsInvestor.com and is republished here with permission.]

The Department of Energy reported this morning that in the week ending Nov. 28, U.S. crude oil inventories decreased by 3.7 million barrels, gasoline inventories increased by 2.1 million barrels, distillate inventories increased by 3 million barrels and total petroleum decreased by 1.1 million barrels.

The free fall in oil continued over the past week, as Brent and WTI hit fresh five-year lows on Monday of $67.53 and $63.72, respectively. Prices fell especially hard on Thursday and Friday following OPEC's decision not to cut output. Currently, Brent is attempting to hold near $70, a level that corresponds to a technical support area from 2010.

BRENT

From June's peak of $115.71 to the recent trough, Brent has fallen $48.18, or 41.6 percent, in the span of a little more than five months. This is the largest crude oil sell-off since the 2008/2009 financial crisis when prices plummeted from nearly $150 to $40.

Of course, that collapse was the result of a severe global economic downturn and consequent loss of oil demand. In the current case, the economy is growing and demand is rising; it's just that supply is rising even faster than demand.

Some have blamed OPEC (particularly Saudi Arabia) for the decline in oil prices, but that is far from the case. It's not that the Saudis want lower oil prices, they just recognize it would be futile to trim production in the face of surging production in other countries. Indeed, OPEC's output quota has been 30 million barrels per day since December 2011. The rollover of the quota would not even be news if oil prices weren't plunging.

OPEC's unwillingness to cut output at this latest meeting leaves the onus on the market pricing mechanism to balance supply and demand. Prices must go low enough to spur a decrease in supply or an increase in demand—or a combination of the two.

But just how big is the oil glut that must be dealt with?

 

 

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