06.04 Did the Oil Glut Just Disappear?

In 2014, OPEC’s stated production quota was set at 30 million barrels per day and overall the average production by OPEC was close to that number. OPEC’s production in March and April of 2015 suddenly jumped to 30.8 million barrels per day, the bulk of the increase coming from Saudi Arabia. Production from the Saudis increased by approximately 400,000 barrels per day over the last two months. Many analysts assumed it was a deliberate move to keep oil prices down and keep pressure on non-OPEC suppliers such as the United States.

What has been largely overlooked are the two new refineries that the Saudis brought online in late 2014 and early 2015. These two refineries have the capacity to process 800,000 barrels per day into finished product.

It appears that the big jump in production has been to compensate for an increase in domestic consumption brought on by its refinery. According to Reuters, the Saudis turned down a request for extra oil from China, just as China has become the largest importer of oil in the world. China now imports over 7.4 million barrels per day surpassing the United States. The Kuwaitis were reported to have turned down requests for increased oil during the same time period.

According to Jeffrey Brown’s Export Land Model, consumption by exporting nations has been increasing since 2004 and production peaked in 2004. Almost all substantial increases in world oil production since 2004 have come from Russia, the United States and Canada.


The rig count in North America hit a 12-year low this week and has fallen by more than 1,000 rigs. The count has fallen from 2,064 to 957 rigs. Government estimates production in the U.S. increased to a new record in March; these estimates are a combination of 6 to 8 months of trailing production data compiled by the states and forecasting models. These estimates are in direct conflict with actual production data provided by the States of Texas and Wyoming. March data for Wyoming was relatively flat when compared with February, but down significantly from December of 2014 and the Texas Railroad Commission was tracking a 2% drop in production from the prior months. Rail data from Wyoming for the first quarter showed oil shipped was down by 100,000 barrels per day.

Two unexpected developments have knocked close to half a million barrels offline recently. An operational dispute between Saudi Arabia and Kuwait has shut in around 200,000 barrels per day in disputed territories, with no indications that the dispute will be resolved quickly. In Canada, a large wildfire has caused 10% of production to be shut in and staffs to be evacuated. In Iraq, a battle continues to rage over one of the largest refineries in the country. When oil prices climbed to over $110 a barrel in 2014, possible disruptions to supply were sited. In June of 2015, large disruptions have begun to occur.

What will happen to oil prices with North America rig count down by over 50%, China’s record imports and a jump in OPEC consumption?

Steve Titcomb, Investment Advisor, Echelon Investment Management