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Dallas Fed Unplugs Oil Bulls, Warns of Liquidity Crunch, Contagion

Dallas Fed Unplugs Oil Bulls, Warns of Liquidity Crunch, Contagion

“Negative ripple effects”

The rally in crude oil has been red hot. In the three weeks since February 11, WTI shot up a short-crushing 34% to $34.69 a barrel at the moment. Now the talk in the oil patch is at what price these desperate shale oil drillers will once again increase production.

Continental Resources CEO John Hart and Whiting Petroleum CEO Jim Volker told analysts this week that they’d step on the accelerator once oil reaches the $40 to $45 range. After all, drillers have to produce oil to be able to service their mountain of debts. They can’t just switch to selling T-shirts.

Alas, that looming increase in production won’t help deal with the glut. And a glut it is.

Dallas Fed President Robert Kaplan hammered this home as part of a wide-ranging speech today. And he wasn’t speaking only for himself or stating his own wayward opinion. Instead, he started out his comments concerning oil with this: “It is our view at the Dallas Fed that….” So this is official.

The Dallas Fed, whose district in addition to Texas includes northern Louisiana and southern New Mexico, figured that global oil production in 2016 will exceed consumption by an average of 1 million barrels per day. So that would amount to adding another 300 million barrels by year-end to the already ballooning crude oil inventories around the world.

In OECD countries, inventories continue to rise, he said, and are now at “roughly 400 million barrels above the historical five-year average.”

But the excess of production over consumption is coming down to 500,000 barrels per day by the end of the year, not because production will decline, but because consumption in 2016 is expected to grow by about 1.2 million barrels per day:

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Olduvai IV: Courage
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