Oil inventories have been growing lately, as you know if you’ve been reading this blog: We now have 450 million barrels on hand, versus an available physical storage capacity (in the U.S.) of 521 million barrels. Most major (and many smaller) oil companies have made drastic cuts to CapEx expenditures for 2015, which means less exploration and new drilling. Which should slow the pile-up of crude stocks, right?
Wrong. It’s true that many less-productive rigs are being idled. As of a week ago, only 866 rigs were still active in the U.S., down almost 50% from October, when they’d peaked at 1,609. But here’s the nasty little secret most people outside of the oil industry don’t know: Many small to midsize producers have no way to service their debt except to sell oil. Therefore, most are continuing to bring oil to market as fast as they can (but also as cheaply as they can, using only the most efficient rigs). In fact, the cheaper oil becomes, the more oil these producers have to bring to market to service their debt. Hence, production will only continue to skyrocket.
Some indication of how serious the situation is can perhaps be garnered from the surprise announcement last Friday that the U.S. government will buy 5 million barrels of oil for the Strategic Petroleum Reserve. Just a year ago, the Dept. of Energy caught oil markets off guard with a “test sale” of 5 million barrels of oil from the Strategic Petroleum Reserve. Thus, the Dept. of Energy has gone from selling oil to being a buyer of reserve oil, in one year.
It will have little effect, in any case. While 5 million barrels may sound like a lot of oil, it represents only one week’s additional inventory surplus, or half a day of production. Unless the government decides to buy this much oil every week, we’re looking at a continued pile-up of 4 to 7 million barrels of surplus oil per week, meaning we might be just 10 weeks away from hitting the absolute storage limit of 521 million barrels. As we approach that limit, oil prices will fall, perhaps precipitously, and some producers will default on their debts, a process that has already begun.
11 Most Read IRIS Articles of the Week!
Knowing Your Unique Selling Points Can Separate You from Other Advisors
How to Ensure Maximum Reach with Your Content Strategy
Understanding Indexed Life Illustrations
Why You Might Not Be Getting New Business The Easy Way
7 Facts That Can Destroy Your Retirement Vision
One Huge Leadership Secret to Get Innovative Ideas You Need
Is Your Financial Advisor Acting in Your Best Interests?
How to Build an Interesting News Story for Journalists and Their Readers
Nothing Sells Itself
Development2 days ago
How to Think like the Best Advisors in the Business
Research2 days ago
Reaction to Growing Number of Millionaires
Development2 days ago
Regardless of a Client’s Financial Position, Provide Them Hope
Development3 days ago
The Billion-Dollar Mindset: What Drives Top Advisors?
Equities3 days ago
How the Deficit Will Reach $40 Trillion
Strategies3 days ago
Tweeting Away Market Complacency
Strategies4 days ago
Why You Should Bet The Pot on a Trader Who Plays Poker
Development4 days ago
When Products Become Entitlements, Then People Buy!