Current Crude Oil Turmoil Could Be a Precursor to a Bigger Crash
Supply and demand outlook
The EIA (U.S. Energy Information Administration) released its STEO (Short-Term Energy Outlook) report on December 8, 2015. The government agency projects that crude oil production could average 93.8 MMbpd (million barrels per day) in 2015 and 95.8 MMbpd in 2016. OPEC’s (Organization of the Petroleum Exporting Countries) production should continue to increase in 2016, as compared to 2015. OPEC’s surplus production capacity should also increase in 2016. However, non-OPEC production is estimated to fall from 58.1 MMbpd in 2015 to 57.7 MMbpd in 2016.
The STEO report also reported that demand is expected to rise to 93.8 MMbpd in 2015 and 95.2 MMbpd in 2016. The consensus of rising demand would balance supply and demand in 2016. However, the EIA has not accounted for the consensus of rising supply from Iran due to the easing of Western oil sanctions. In 2016, slowing US production could bring relief to excess oil supply in the market. However, global inventories are expected to grow to 3 billion barrels in 2016, which would put continuing pressure on the global crude oil market.
Impact of rising inventory
The supply and demand gap may narrow in 2016, but record inventory and rising supply from OPEC should add pressure to the global oil market. Hence, 2016 will also likely be a year of oversupply.
As a result, many oil and gas companies have cut their expenses in 2016. Integrated oil and gas companies like ExxonMobil (XOM), Chevron Corporation (CVX), Royal Dutch Shell (RDS.A), Eni (ENI), and Petrobras (PBR) have reduced their capital expenditures in 2016. ETFs like the First Trust Energy AlphaDEX Fund (FXN) and the iShares US Oil Equipment & Services ETF (IEZ) are also influenced by the volatility in the energy market.
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