Oil Markets Are Balancing Faster Than IEA Would Have Us Believe
Fundamentals point toward market balance but pessimism is dragging oil prices down. IEA has apparently succumbed to this negativity but their data suggests that things are getting better, not worse.
In a business-as-usual world in which nothing unusual happens, the world will be close to market balance some time in 2016. If anything unusual happens, all bets are off and oil prices could rebound much faster than anyone imagines.
A Year of Extreme Price Cycles
NYMEX WTI futures prices have fallen 34 percent since October 2015, and are below $30.00 per barrel for the first time since 2003. Prices have gone through four cycles of 30-40 percent increases and decreases over the past year (Figure 1).
Figure 1. NYMEX WTI futures prices and price cycles in 2015. Source: EIA, Bloomberg & Labyrinth Consulting Services, Inc.
(Click image to enlarge)
The two price rallies from March-to-June and from August-to-October were based largely on hope and the price decline from June-to-August represented a return to the reality of supply and demand fundamentals.
The most recent price decline that began in October is a bit different. Here, confirmation bias has replaced critical thinking about the oil market. The ruling paradigm is that prices are likely to stay low for years or even for decades and evidence is easily found that favors and confirms this bias. I believe that this paradigm is incorrect.
Despite troubling signals of structural weakness in the global economy, data suggests that the oil market is stumbling toward balance. Although I have said that prices must go lower in order to flush out the zombie producers, IEA’s statement in the January Oil Market Report that the world could drown in over-supply is based more on sentiment and pessimism than on data.
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