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There is still a lot of uncertainty, but this is not a good sign.
The economics of the US oil industry are in big trouble, as are global supply chain dynamics.
And to make it even worse, crude oil prices are in their lowest level in more than five years—and it feels as if this situation is unlikely to improve in the near future.
Just today, WTI oil futures fell by more than $5/bbl in one day alone, hitting a low of $45.75. This is a low that only looks likely to recur over the course of the next year and a half.
Here are the key facts and issues to consider:
Crude oil continues to fall, despite a very high inventory build—at a time when US refineries are still damaged.
Low prices cause producers to shut in rather than expand production, which in turn causes inventories to build.
Producers are cutting spending and cutting back on drilling projects, which in turn tends to give the impression of a longer-term supply shortage.
To top it all, the fracking revolution is close to peak, and it’s not clear how quickly producers can build up the necessary inventory to replace these fields.
There is a greater chance than ever that oil prices will be below $30/bbl in 2018, which will also weigh heavily on US production. The American shale boom peaked in 2015, around the time that Brent crude crossed $100/bbl.
I won’t pretend to have a crystal ball on this one, but there are a few things that I’d be looking out for in the months ahead.
First, if we are getting a new “round of inventory-building,” the recent price spike (to about $60) will look like a complete anomaly.
The only time in recent history that crude prices reached levels this high was during the OPEC/non-OPEC deal in 2012, which was designed as a way to “invent a global surplus” in an attempt to “take some pressure off of the US oil market.”
However, the only oil producers that benefitted were the shale drillers, with production rising from 9
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