The global oil glut is worsening to the point where the world is running out of places to store it. A side-effect of this oil glut is that refineries have been operating at capacity in an effort by oil companies to improve profits and draw down stockpiles. This has led in turn to a glut in finished distillates such as gasoline, diesel, and heating oil.
How Bad Is It?
NYMEX oil futures (West Texas Intermediate crude) were down 5.6% last week, and prices are still falling, hitting a two-month low early this week. Crude inventories in the U.S. are forecast to climb by 3.5 million barrels for last week, which would be a fifth consecutive week of increases. According to the EIA, inventories are currently more than 100 million barrels above their five-year, seasonally adjusted average.
Natural gas has fared even worse, falling below $2 per million BTUs for the first time since 2012. Stockpiles of U.S. natural gas are at their highest levels since 2006.
In fact, storage capacity is even becoming an issue: They're running out of places to store the stuff. According to a note from Goldman Sachs,
"Distillate storage utilization in the U.S. and Europe is nearing historically high levels, following near record refinery utilization, only modest demand growth (especially relative to gasoline), and increased imports from the East on refinery expansion and Chinese exports.
"This raises the specter of 1998 (and) 2009 when distillate storage hit capacity, pushing runs and crude oil prices sharply lower."
What Is Causing The Global Oil Glut?
There are three major causes of the present oil glut: a battle for market share among producers, the effect of a strong El Niño on global weather, and falling demand as a result of both developments.
Oil Patch Deathmatch
The largest factor in plummeting oil prices has been the November 2014 decision by OPEC to increase production in order to drive US and Canadian fracking operations out of business. The "shale revolution" had catapulted the U.S. into the position of the world's largest oil producer, leading to the U.S. becoming nearly self-sufficient for petroleum.
Led by Saudi Arabia, OPEC nations have been pumping at a record pace. However, the hoped-for collapse in shale drilling companies hasn't happened after nearly a year of rock-bottom oil prices. The high expense and highly leveraged fracking companies have been flushed out of the market, but the companies on high-yield shale fields have parleyed technological advances and reductions in exploration into a sustainable business. In fact, the best of the shale companies have actually grown. The oil sectors with the highest casualties have been offshore and Arctic drilling operations, as well as those in very remote areas.
The Saudis are perhaps feeling the pain of low crude prices more than U.S. producers. Meanwhile, on the other side, the country's equities fell to a two-month low on announcements that the government will consider cutting fuel subsidies, effectively raising domestic energy prices. This would be an attempt to mitigate the lower oil revenues from OPEC exceeding its 30-million-barrel production quota for 16 consecutive months.
The El Niño Effect
There's also the influence of the climate on weaker oil demand globally. The El Niño weather pattern has brought about a very mild winter, meaning lower heating costs and less demand for energy. The climate has depressed oil demand on whole, but in some instances the reverse is true. The drought in Europe, for example, has caused especially low water levels in the Rhine River—meaning that oil barges can't bring fuel from Antwerp to Germany's industrial heartland, resulting in a shipping backlog.
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