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Big Picture: Will the Crude Oil Supply and Demand Narrow?

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Crude oil supply and demand

On October 6, 2015, the EIA (U.S. Energy Information Administration) published it monthly STEO (Short-Term Energy Outlook) report. The EIA reported that US production fell by 120,000 bpd (barrels per day) to 9 MMbpd (million barrels per day) in September 2015—the lowest level since September 2014. The US crude oil production peaked at 9.6 MMbpd in April 2015—the highest level since the 1970s. The slowing US production could narrow down the crude oil supply and demand gap. It could support crude oil prices in the short term. Crude oil’s global production is expected to average 95.6 MMbpd in 2015—compared to 93.3 MMbpd in 2014. The production is expected to average around 96 MMbpd in 2016.

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Impact

The EIA also added that global consumption could average around 93.79 MMbpd and 95.20 MMbpd, respectively, in 2015 and 2016. The demand would likely be driven by the US as well as Asian majors like India and South Korea. However, concerns of the slowing Chinese economy could impact Chinese crude oil imports. However, it will lead the Asian crude oil demand.

Meanwhile, global crude oil inventories averaged around 2 MMbbls (million barrels) in 2015. It’s expected to fall to 0.8 MMbpd in 2016. The slowing US production and rising demand could narrow down the supply and demand gap. The speculation of Russia and the Middle East discussing the crude oil turmoil could benefit crude oil prices in the short term.

However, the big picture focuses on why oil heavyweights will curb their production for oil prices to rise. If oil prices rise, US shale producers will scale up production and increase their market share. In contrast, lower oil prices impact US energy producers like EOG Resources (EOG), Anadarko Petroleum (APC), and Chevron (CVX). They account for 20% of the Energy Select Sector SPDR ETF (XLE). These stocks’ crude oil production mix is more than 41% of their total production. They also impact ETFs like the SPDR S&P Oil & Gas Exploration & Production ETF (XOP) and the ProShares Ultra DJ-UBS Crude Oil (UCO).

Even if Russia and Saudi Arabia plan to curb the oil production, will Iran and Iraq curb the production as well? Also, China, Brazil, Japan, Europe’s weak demand could play a vital role in keeping prices low due to their slowing economic growth.

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