Why The Oil Price Collapse Is U.S. Shale’s Fault
The present oil price collapse is because of over-production of expensive tight oil. The collapse occurred because of the inability of the world market to support the cost of the new expensive oil supply from shale, oil sands and deep water. Demand was progressively destroyed during the longest period of sustained high oil prices in history from 2010 through 2014.
Since the early 2000s, the price of oil was largely insensitive to the fundamentals of supply and demand as long as prices were less than about $90 per barrel. The chart below shows world liquids supply minus demand (relative supply surplus or deficit), and WTI oil price.
Figure 1. World liquids relative surplus or deficit (production minus consumption) and WTI crude oil price adjusted using the consumer price index (CPI) to real February 2015 U.S. dollars, 2003-2015. Source: EIA, U.S. Bureau of Labor Statistics, and Labyrinth Consulting Services, Inc.
(click to enlarge image)
In mid-2004 and mid-2005, the relative supply surplus was much greater than it has been during the 2014-2015 price collapse yet prices continued to rise. When oil traders perceive supply limits and rising prices, price below some critical threshold is not an issue. They are willing to carry the cost of storage and interest to hold the commodity in the future when it will be more valuable.
Related: Finally Some Good News For Oil Prices
In 2004, the relative supply surplus reached 1.9 million barrels per day and in 2005, it reached 4.1 million barrels per day. By contrast, the greatest supply surplus in the current oil price collapse was 1.7 million barrels per day in January 2015.
…click on the above link to read the rest of the article…
