Thursday, March 3, 2016

Saudi Arabia faces new oil titan if it wins shale battle

  • From @Bloomberg -- Even if Saudi Arabia wins its struggle with US shale producers over market share, it will face a new billion-barrel adversary.

    It won’t be regional nemesis Iran, a resurgent Iraq or long-standing competitor Russia. The answer will be more prosaic: Even when overproduction ends, a stockpile surplus of more than 1 Bbbl built up since 2014 will remain, weighing on prices. Inventories will keep accumulating until the end of 2017, the International Energy Agency forecasts, and clearing the glut could take years.

    Since it was unveiled in late 2014, Saudi Arabia’s strategy to bring the world’s oversupplied oil markets back into balance by squeezing competitors with lower prices has proved grueling, dragging crude down to less than $30/bbl last month. While a gradual decline in U.S. production signals supply will stop growing, the second act of the process may prove the longest as stockpiles slowly contract.

    For a historical precedent, Goldman Sachs points to the oil glut that developed in 1998 to 1999 as demand plunged in the wake of the Asian financial crisis. Crude prices kept falling even as OPEC made output cuts in March and then June of 1998, slipping below $10/bbl in London in December of that year. It wasn’t until stockpiles in developed economies started dropping in early 1999 that the recovery took shape.

    Between late 2014, when developed-world stockpiles were at about average levels, and the end of this year, global inventories will have swelled by about 1.1 Bbbl, IEA data shows. Another 37 MMbbl will be added in 2017. Taking the agency’s projections for how quickly inventories will then fall, and estimates from Energy Aspects that 290 MMbbl will flow into China’s strategic reserves, it will take until 2021 to clear what’s accumulated.

    The latest data from the American Petroleum Institute show the build-up in the US is only getting bigger, with the nation’s crude stockpiles ballooning by 9.9 MMbbl last week


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