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Crude Oil Market May Benefit from Narrowing Supply and Demand Gap

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Supply and demand gap in 2016 and 2017 

Yesterday, the IEA (International Energy Agency) published its Medium-Term Oil Market Report. The Paris-based energy watchdog reported that US crude oil production could fall by 600,000 bpd (barrels per day) in 2016 and by another 200,000 in 2017. Thus, by the end of 2017, we could see the crude oil supply and demand gap come close to zero, as seen in the chart below. Further, the EIA (U.S. Energy Information Administration) estimates that the crude oil supply and demand gap will average around 290,000 in 2017. The current high inventories are affecting crude oil prices. To learn about crude oil producers’ reaction to low prices, read How Crude Oil Producers Are Playing the Forward Market.

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The narrowing crude oil supply and demand gap could lead crude oil prices to rally in 2017. We’ll discuss crude oil price forecasts in the next part of this series. The catastrophic fall in crude oil prices since June 2014 has led to the decline in investments in oil and gas projects. Data intelligence and consulting company Wood Mackenzie estimates that oil and gas exploration and production projects worth $380 billion have been curbed since June 2014. Wood McKenzie also estimates that 68 oil and gas mega projects have been canceled due to the lowest crude oil prices we’ve seen in the last 12 years. If implemented, these projects could produce around 27 billion barrels of oil and natural gas.

Decline in crude oil production over the long term

Wood Mackenzie added that capital expenditures worth $170 billion scheduled for 2016 to 2020 have been slashed. Major oil players like Royal Dutch Shell (RDS.A), ExxonMobil (XOM), Continental Resources (CLR), Noble Energy (NBL), Chevron (CVX), and Total (TOT) have all slashed their capital expenditure budgets.

The decline in capital expenditures could lead to a fall in crude oil production by 2.9 MMbpd (million barrels per day) over the long term. This would boost crude oil prices and benefit US shale crude oil producers like Laredo Petroleum (LPI) and Pioneer Natural Resources (PXD). For more on US energy companies’ financial woes, read US Oil and Gas Companies’ Debt Exceeds $200 Billion.

Crude oil ETFs

ETFs and ETNs like the ProShares UltraShort Bloomberg Crude Oil ETF (SCO), the First Trust Energy AlphaDEX Fund (FXN), the United States Oil Fund (USO), and the VelocityShares 3X Long Crude Oil ETN (UWTI) are also impacted by the ups and downs in the oil and gas market.

In the next part of this series, we’ll look at the latest forecasts for crude oil prices over the long term.

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