Are US oil oversupply concerns finally over?
US oil industry has been actively driving up output throughout this year, but further expansion of production must face serious challenges.
Since the beginning of the year, oil production in the US increased by 1.1 million barrels and reached a level of 10.9 million barrels per day. But for the last three weeks the pace of drilling in the United States has not changed, which can indicate production finally hit capacity constraints.
In addition, the number of drilling rigs stopped appear to have stagnated. Baker Hughes data indicate that rig count has been decreasing for several consecutive weeks, starting from May:
US weekly oil rig count. Source: Baker Hughes
Shale oil production at the Permian basin (million bar per day). Source: Rystad Energy
In addition, the number of refineries staying idle in the United States reached zero this year, i.e. ALL of them are busy refining oil and excesses should be stored as crude oil what is a risk for producers. For the first time in history, the US Department of Energy reported that there are no unloaded plants in the country.
Number of refineries out of operations (units). Source: Rystad Energy
By the beginning of this year absolutely all capacities were involved. Talking about Permian basin production forecast traders become more confident that the space of expansion shrinks rapidly and new output records are unlikely to happen.
Taking into account that all the plants are fully loaded, excess production will fill the tanks and be reflected in weekly API crude inventories data. Increasing oil stocks mean that producers expected prices to rise more, while decreasing inventories show that producers are unsure about further price growth. Today, the United States stores are about half full.
But there can be no point to store additional oil now, as prices are at a fairly high level, so manufacturers may prefer to receive income today, not tomorrow.
Thus, it can be assumed that in a number of regions, the extraction of crude oil has reached its local limits and without expansion of the infrastructure producers are unlikely to significantly increase production.
What are other signs the oil glut is over?
Of course prices says it all. Take a glance at Brent-WTI spread which indicates supply and demand balance for both grades. For example when spread declines it means either WTI supply falls or Brent supply increases. From the consumption side, WTI should be demanded more for spread to shrink and demand for Brent should decline. As Brent production is more and less predictable, changes in spread between Brent and WTI mostly reflect changes in US production and consumption for both grades.
Long time there was a cap for exports of oil from the US which was lifted only recently what essentially widened spread as US production started to rise.
Spread between Brent and WTI. Source: Ycharts
More signs of stock market crash?
The fears of tariff wars throwing stocks markets into abyss led to a sharp increase in trading volumes.
According to the Bloomberg, for two consecutive quarters the volume of trading on the US stock market exceeds 2.9 trillion dollars. The last time such high activity was observed in 2008.
Turnover of shares in the S&P 500 (trillion dollars). Source: Bloomberg
In addition, emerging markets also set a long record for the volume of transactions made. In the second quarter of 2018, the turnover reached 1.9 trillion dollars. This has not happened since 1998 when the world faced the Asian crisis.
Turnover in emerging markets (trillion dollars) Source: Bloomberg
The volume of trading in emerging markets is primarily associated with a tightening of monetary policy in the United States. Raising rates and deflating Fed’s balance sheet led to capital flight back to US, thereby increasing turnover, as investors had to get rid of EM assets.
Also, the “trade wars” unleashed by the United States is a big point of concern.
World crises don’t usually come out of the blue, they are preceded with the ground becoming more “fertile” for that. Now we can assume that traders becoming increasingly aware of possible negative outcomes and try to cut their risk exposure.
The collapse of the markets in 2008 did not happen overnight, at first the volatility and trading volume began to grow and only then did the stocks fail and went down. The situation this year is similar to the one that preceded the crisis.
The transition to a full-scale “bearish” market is unlikely to happen in the near future – it takes time for preparation, but small corrections and increased volatility will surely accompany stock exchanges throughout 2018.