What none of the analysts are talking about these days is the “demand” side of the oil market equation. Low prices have spurred demand through very high sales in the truck and SUV markets and have taken substitute products to their lowest levels in years. In 2014, demand for oil grew 1.2 million barrels per day to reach a total of 92.4 million barrels per day. In 2015, demand growth is estimated at 1.4 million barrels a day, and in 2016, demand will grow an additional 1.4 million barrels per day to reach a staggering 95.2 million barrels per day; maybe more!
What the OPEC strategy essentially does is expand the overall market for oil. This expansion makes room for Iran’s increased production and also allows member nations to produce much more than they have in the past. The dilemma here is that OPEC probably can’t produce enough to meet the global demand for oil and will rely on oil producers outside the cartel to pick up the slack which they’ll be happy to do. Yes, the oil frackers will return when oil prices get high enough, but by then the expanded market should accommodate them nicely for several years to come.
WHY IS THE OIL MARKET GROWING?
It’s really just simple economics…. When oil prices come down, substitute products like natural gas and electric vehicles dry up (nobody wants to buy them)… When oil prices are high, innovation ensues and engineers look for innovative ways to save the consumer money in his or her daily lives. They produce things like the Toyota Prius or the Honda Insight as a way to save consumer dollars. In today’s low oil price environment, those products have fallen by the waste side while consumers go for the more luxurious trucks and SUVs. Also, the trucking industry has gotten away from natural gas Class 8 trucks which were a hot commodity only a year ago…
So, the longer OPEC can keep prices down, the more the market will grow, keeping the world dependent on oil. Even Iranian oil won’t be a problem in the new world order.
Through these actions, OPEC has been able to spur demand by incredible amounts. Truck and SUV sales are being sold at record pace across the globe. Consumers are falling for it; hook, line, and sinker! They’re buying the gas guzzlers in record numbers. You’ll hear the rhetoric at this year’s OPEC summit, but rest assured, there’s absolutely no appetite for an OPEC cut in production. This is all just a show while the world sits there and falls for it. Believe me, they’ll accommodate low prices as long as the market will allow them.
As oil prices stay low, OPEC competition sits in the wings, waiting for their moment in the sun. What they don’t understand is that OPEC may just wind up being their best friend. They have expanded the market and continue to grow it every day the market stays at such a low level. Rest assured though, this is exactly what they want. They want substitute products out of the market place. They want large investments on a personal level by consumers and businesses and they want to shut down the assembly lines those substitutes are tied to.
As oil production is shut down and frack wells dry up, American production goes down. It’s going down at roughly 100,000 barrels a day each and every month, and could speed up if oil prices go lower, which is exactly what OPEC wants. They want to be the first stop in the newly created and expanded oil market. The big question on everyone’s mind is when do we see a balanced market? Well, it just depends on who you ask. The bigger question is how long can OPEC meet this increasing demand? We have seen countries like Venezuela start new drilling programs, so it’s probably right around the corner.
This is a typical cycle in the oil business. It happens from time to time to keep the world dependent on oil. Believe me, the longer it lasts, the more dependent we become. OPEC understands these dynamics and now you do too!
Update: 18 Jan 2016:
The IEA (International Energy Agency) has revised anticipated global demand for oil up to 96.71 million barrels a day. Meanwhile, companies everywhere are reducing CAPEX (capital expenditures) for new oil projects. The fresh wave of demand growth will be very hard for the market to meet without investment being made by big oil. This will have a significant impact in the later half of 2016. Remember “shale” oil reduces at 20% annually, so I’d expect US production to ramp down much faster than in years past. Even with new Iranian oil hitting the market, supply will start to get pressured heavily in the last half of the year.