Oil supply glut still at large

Since June 2014 crude oil has fallen more than 50% though in recent trades especially Brent crude showing some resilience. WTI is currently trading at $53/barrel and Brent trading above $62/barrel. The drop has so far been blamed on the shale oil production in the US. Some of the oil companies have already announced shelving of future projects. BP has announced a deep cut of 20% in its investment into new projects. This so far has produced muted impact, so we decided to take a deeper look.

a.    US Contribution

Crude oil production has increased from 5 million barrel/day (mbd) in 2009 to 9.2 mbd in February 2015. The production has been increasing despite the fall in oil price. In our view, the market has started taking this into account, as the Brent & WTI spread has increased from $1 few weeks ago to currently above $9.

b.    Fighting for share

Lack of demand from US and disappearance of Petro dollar has prompted oil giants like Saudi Arabia to fight for greater market share. This has resulted in oil producing countries globally to avoid cutting down on production; instead they fired up the engine a bit more to gain on as much share possible.

c.    Russia Ukraine conflict

The sanctions imposed on Russia, made it hungry for petro dollar finances. When the margins are down it makes sense for Russia to increase output and revenue. Russia took over Saudi Arabia as the largest oil producer in the world.

d.    Lacklustre demand

The reduced demand from the developed economies has contributed the supply demand gap especially from the still crisis deepened countries in Euro zone and elsewhere.

We believe the supply demand gap to persist still and our outlook for crude remains bearish though some bounce back may be seen after such one-sided fall.

The chart explains the gap between supply and demand in greater detail.