Oil futures prices (WTI) plunged 12.5% this week from $47.90 on Friday, November 3 to $41.96 this morning Wednesday, November 11. The main reason is that the global supply imbalance is getting worse.

The U.S. Energy Information Administration’s (EIA) latest report indicates that the world supply surplus (production minus consumption) increased 590,000 barrels per day (bpd) compared to September to 1.58 million bpd (Figure 1).



Figure 1. World liquids production, consumption and relative surplus or deficit.

Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

Supply was flat but consumption decreased 520,000 bpd. Weaker consumption suggests weakening demand, a disturbing trend that is also evident in year-over-year consumption-change data (Figure 2).

Figure 2. World year-over-year liquids consumption change.

Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)



Only OPEC and IEA estimate global oil demand. The OPEC Monthly Oil Market Report released today shows world oil demand growth of 1.6 million bpd so far in 2015 (Figure 3) but decreasing to 1.5 million bpd overall for the year and only 1.25 million bpd for 2016. OPEC data indicates about 1 million barrels of surplus supply relative to demand.



Figure 3. Supply/demand growth for first three quarters 2015, mb/d. Source: OPEC November 2015 Monthly Oil Market Report.

(click image to enlarge)

The EIA also revised the decline in U.S. crude oil production to 490,000 bpd since April (Figure 4) from its estimate last month of 590,000 bpd.



Figure 4. U.S. crude oil production and forecast. Source: EIA and Labyrinth Consulting Services, Inc.

(click image to enlarge)

The good news is that the EIA forecasts an ongoing decline in U.S. oil production of more than 1 million bpd by September 2016.

Overall, the outlook suggests a persistant market imbalance. Supply growth has stopped but remains higher than demand and the forecast is for weaker demand growth going forward. The only near-term hope for improved prices, therefore, is a decline in world production of about 1 million barrels per day. Falling U.S. production will help move fundamentals toward balance but represents too little decline over too long a period to bring price relief any time soon.

Last week, Daniel Yergin and Andy Hall predicted that oil prices had reached a bottom. I fear that their optimism is based on sentiment. Although it makes sense that lower oil prices should result in increased demand, data offers little encouragement so far.

A weak global economy that is over-loaded with debt is a powerful obstacle to oil-demand growth. Only the pain of lower prices will force global producers to reduce supply enough to create an oil-price recovery.