07.02 Energy Markets: Economics 101 to the Rescue

For the past year the world investment community has been largely focused on the oversupply or glut in oil brought about by increased production from North America. A popular number that has often been quoted is the world was oversupplied by 2 million barrels per day. In 2014, the world consumed 92.6 million barrels per day and assuming the world was over supplied by 2 million barrels, the markets were over supplied by a little over 2%.

The IEA now estimates that global demand has increased by 1.4 million barrels per day in 2015, spurred by lower oil and refined production prices. Demand is up in the United States and China and India has now surpassed Japan as the number 3 importer of oil. Demand in the United States alone has increased by 820,000 barrels per day. The Saudis have increased their production by approximately 400,000 per month, but their own internal used has jumped by over 800,000 per day as two new refineries have come online in the last six months.

Supplies in the U.S. may be beginning to fall due to a dramatic cut in drilling activity. Production in the Bakken in North Dakota from April has dropped nearly 60,000 barrels per day from its peak in December according to data provided by the State Commission. Preliminary data from the State of Texas indicates production of oil and natural gas were down in April. The United States is not the only one seeing production taking a hit as Barclays estimates that Canada saw a drop of close to 600,000 barrels per day.

The industry has reacted to lower oil prices by slashing the rig count in North America by 1,115 rigs, more than half the total from the year before. Worldwide over $200 billion in mega projects have been either delayed or postponed indefinitely. Large budget cuts were recently announced in both Brazil and Iraq due to to lower oil prices.

It would appear that basic economics have begun to work in rebalancing the energy markets; lower prices encouraged demand and at the same time reduced capex investment in new drilling which is beginning to show up in lower supplies in the United States and Canada. The IEA now estimates that worldwide demand will increase to 94 million barrels per day.

Steve Titcomb, Investment Advisor, Echelon Investment Management

Photo credit: Ed Schipul