Oil Supply Disruptions and The Price Of Oil
Thursday June 2, 2016
Global crude oil supply has suffered significant disruption in recent weeks from sabotage in Nigeria, fires in Canada, and political failure in Venezuela, supporting a rise in prices to nearly $50 a barrel. By some accounts the supply disruptions have reduced the previous surplus and will allow a rebalancing of global inventory if supply remains constrained.
Global Crude Inventory Now Appears Stable
For decades the market has relied upon OPEC to increase production after a supply-shock to keep crude consumers well-supplied. The OPEC Thanksgiving 2014 decision not to restrict, and the Saudi Arabian decision to increase, production has allowed crude oil inventory to grow with a parallel decline in price. The decision to delay or cancel capital intensive exploration and production projects, reduced North American unconventional activity, and demand growth have recently stabilized inventory levels.
Is Spare Production Available To Meet Demand If More Supply Disrupted?
Most analysts do not expect OPEC to reduce production at its June 2, 2016 meeting. Not cutting production will likely slow other producers from bring production back to market as more inventory is worked through.
Some oil analysts believe the OPEC decision to continue producing at current high level reduces its ability to rapidly increase production should another significant supply disruption occur. If true, then an additional future disruption could introduce a sudden, unexpected price shock.
Historic Relationship Between Oil Supply Shocks And Prices
The Center for Financial Studies (CFS) published “Forty Years of Oil Pri...