Crude Oil Market: Fundamental Picture in 2016
Crude Oil Prices Recover: What’s the New Catalyst?
EIA global inventory estimates
The EIA (U.S. Energy Information Administration) published its monthly STEO (Short-Term Energy Outlook) report on August 11, 2015. The government data showed that global inventories might rise to 2.7 MMbpd (million barrels per day) in 2Q15. This is a rise of 0.8 MMbpd compared to 1Q15. The global inventory is estimated to slow down to 1.8MMbpd in 2H15. It might slow down more to 0.9 MMbpd in 2016. This suggests that the global production in 2016 is expected to slow down due to lower crude oil prices. However, we could see a marginal rise in consumption in 2016.
Is the EIA too conservative?
Market experts like Morgan Stanley expect that the EIA’s estimates are common historical revisions. However, we think that these numbers are conservative. Why? The Iranian nuclear accord, the consensus of easing oil sanctions, OPEC’s (Organization of the Petroleum Exporting Countries) strategy of record production, and increased production from the Middle East countries like Iraq will increase the supplies in the crude oil market even though there’s a decrease in the oil production in the long term.
The recent turmoil in the Chinese stock market and speculation of a long-term economic slowdown by China will also widen the supply and demand gap. China is the second largest consumer of crude oil. The Asian major might be joined by Japan and Europe. Their economies also seem to be slowing down. These leading oil importing nations might curb the demand for oil. We could see inventory soar and negatively influence oil prices.
Bloomberg data estimate that the crude oil production from 58 shale producers rose by 19% in 2015—compared to 2014. This is despite spending cuts of $21.7 billion. However, crude oil prices’ downward trend will impact US crude oil producers’ profitability like EOG Resources (EOG), Anadarko Petroleum (APC), and Marathon Oil (MRO). They account for 7.21% of the Energy Select Sector SPDR ETF (XLE). These companies’ crude oil production mix is more than 41% of their total production.
Oil and gas ETFs like the Select Sector SPDR Fund ETF (XLE) and the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) are also affected by falling crude oil prices.
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