It seems that oil is busting out of its bust cycle as the crash in oil prices has put a market that was seriously oversupplied back into a semblance of balance. The reason that we are seeing such a quick turnaround is an old story about how low prices cure low prices.
Low prices have sparked a demand resurgence around the globe and we are seeing record demand in China and The United States. China oil demand urged 1.7 percent in April, hitting 10.62 million barrels per day (bpd) of oil in April, a record daily consumption volume according to Reuters calculations. Reuters also points out that India is seeing surging demand as well and pick up where China left off as the biggest oil demand driver.
According to Reuters India's oil consumption has grown at an average annual rate of 5 percent over the last decade and climbed over 4 million barrels per day for the first time in the year ending in March 2016. India is currently the world's fourth-largest oil consumer after the United States, China and Japan, and set to overtake Japan for the third slot within the next 12-18 months.
Gas demand in the U.S. is also near record highs coming in at a whopping 9.480 million barrels a day last week. Prices will rise at the pump as it appears that oil prices and global demand will compete for that U.S. gallon.
In the meantime, the crash in oil prices have created instability in oil producing nations like Venezuela and Nigeria that are almost totally dependent on the price of oil. Nigeria's oil production has fallen by almost 40 percent to 1.4 million barrels a day due to militant attacks on facilities in the Delta region, its oil minister said on Monday according to Reuters.
Venezuela’s socialist revolution has finally hit what was an inevitable collapse. Even as the nation cut a deal with China to get some cash in an oil-for-loans deal, the odds that Venezuela may default on its debt remains high.
We are seeing falling production in China. Bloomberg News reports that China’s domestic oil production slumped to the lowest in 14 months and coal output declined by the most in at least a year. The world’s second-largest oil consumer reduced crude output in April by 5.6 percent from a year ago to 16.59 million metric tons, the lowest since February 2015, according to data from the National Bureau of Statistics. The biggest decline since November, 2011 pushed daily average output down to 4.05 million barrel.
The oil sands fires in Canada are still costing the market over 1.0 million barrels of oil per day.
The lack of investment, geo-political happenings and wild fires are beginning to take its toll on global oil production and the market is starting to price market balance and the trend of tightening supply or shortages in the future.
The Financial Times reported that most of the world’s largest oil companies have cut research spending sharply since 2013 as they strive to save money in the face of the slump in crude prices, raising concerns about their ability to compete in a changing energy landscape. The FT said that BP (LON:BP) made the biggest cuts, reporting a 41 per cent drop in its research and development spending for 2013-15, in part because of its decision to stop work on advanced cellulosic ethanol. The FT said that other large western oil groups have mostly made cuts of 15-20 per cent, company reports show, with the exceptions of ExxonMobil (NYSE:XOM) of the U.S. and ENI (NYSE:E) of Italy, which have cut by just 3 and 2 percent respectively. R&D cuts will slow the introduction of new technologies and reduce future oil and gas production. Remember it was R&D that helped bring about the shale revolution and it allowed to keep production up when rigs started to fall.
I have been talking for some time that the price crash in oil would have consequences. I have talked about the comparisons to the price crash in 1998-1999. You are seeing those consequences start to be reflected in price. We are at a generational low as the damage done to the oil industry will not be fixed overnight. We are soon on a path to a supply deficit that could last longer than many think. We continue to recommend playing it for the long term.