Global oil supply and demand fundamentals moved in the right direction in September but surplus inventory will keep oil prices low for some time to come.

EIA’s September 2015 STEO (Short Term Energy Outlook) reported lower world liquids production and higher consumption but out-sized inventories remain a major obstacle to near-term oil-price recovery.

Crude oil stocks are the fundamental driver of oil prices and U.S. inventories are more than 100 million barrels above the 5-year average and more than 90 million barrels above the 5-year maximum (Figure 1).



Figure 1. U.S. crude oil stocks showing the 5-year average range and 2015 stocks to date.

Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

OECD stocks are similarly over-supplied and any discussion of higher oil prices is irrelevant until world production declines enough to begin working through inventory volumes.

That is not happening yet.

The latest data from EIA suggests significant improvement in fundamentals of supply and demand although one month does not make a trend. Global liquids supply decreased 560,000 bpd and consumption increased 680,000 bpd in September (Figure 2). The relative production surplus declined 1.24 million bpd but over-supply is still 1.16 million bpd.

Figure 2. World liquids production, consumption and relative surplus or deficit.

Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

U.S. crude oil production decreased 120,000 bpd in September compared to August and has declined 465,000 bpd since April, 2015 (Figure 3).



Figure 3. U.S. crude oil production. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

Oil futures prices have rallied $2 per barrel so far today on this news but the hard reality is that the world still has too much oil supply.

Figure 4 shows a strong correlation between year-over-year inventory levels and oil price. U.S. comparative inventories are the highest in history. The oil-price collapse of 2014-2015 is proportional to the magnitude of the current inventory surplus.

Figure 4. U.S. crude oil comparative inventory, CPI-adjusted (consumer price index) WTI price since 1987 and M1 Money Supply.

Source: EIA, U.S. Bureau of Labor Statistics, St. Louis Federal Reserve Bank and Labyrinth Consulting Services, Inc.

(click image to enlarge)

This follows the longest period of high oil prices in history (red shaded area in Figure 4). Oil prices exceeded $90 per barrel for 47 months between November 2010 and September 2014. This lead to increased investment in oil and gas thanks in part to the expansion of money supply also shown in Figure 4. The resulting over-production is why inventories are bloated and why oil prices collapsed in 2014 and remain near $50 per barrel today.

It is also why oil prices will not move significantly higher despite good news about supply and demand fundamentals.