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How Long Will Production Cuts Help the Global Crude Oil Market?

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Global crude oil supply-demand gap 

The EIA (U.S. Energy Information Administration) estimated that the global crude oil supply-demand gap averaged 1.29 MMbpd (million barrels per day) in 2015. The global crude oil supply-demand gap averaged 0.27 MMbpd in 2016. However, Brent (BNO) and US crude oil (USO) (USL) prices fell by $8.3 per barrel and $5.7 per barrel in 2016—compared to the previous year, despite the narrowing supply-demand gap. It implies that prices move ahead of the supply-demand dynamics.

Moves in oil prices impact oil producers’ (FXN) (FENY) earnings like Continental Resources (CLR), Shell (RDS.A), PDC Energy (PDCE), and Cobalt International Energy (CIE).

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Global oil supply and demand 

According to the EIA, the global oil supply is expected to average 97.99 MMbpd in 2017, which is 760,000 bpd or 0.8% higher than the oil supplies in 2016, despite ongoing production cuts. However, improving crude oil demand and ongoing production cuts supported Brent crude oil prices to a 27-month high on October 30, 2017.

The global oil demand is expected to average 98.3 MMbpd in 2017, which is 1,340,000 bpd or 1.4% higher than the levels in 2016.

Impact 

According to the EIA, the global oil supply is expected to outstrip the demand in 2018. If the production cuts are extended, we could see more supply tightening and rebalancing in the oil market, which would benefit oil prices.

After 2018, if OPEC and Russia ramp up the production along with the US, we could see oversupply in the market again.

Next, we’ll discuss some crude oil price forecasts.

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