Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

Many of us will begin January feeling a bit bloated and sorry for ourselves. Take some comfort -- particularly if you drive a car -- in knowing that the global oil market will likely be in worse shape.

Friday's release of the International Energy Agency's monthly oil report helped tip the light, sweet crude oil price below $36 a barrel. The key line in the 64-page document was right there on the front cover:

"Global inventories are set to keep building at least until late 2016, but at a much slower pace than observed this year."

Oil traders, in a fractious mood of late, chose to focus on the first half of that sentence rather than the glimmer of hope in the latter. As well they might. 

At Least It's the Weekend
Crude oil futures took another tumble on Friday morning
Source: Bloomberg
Note: Intraday prices

In this column a few weeks ago, I used the IEA's projections to map out how the glut of oil inventories weighing on prices might move over the course of next year. At the end of the third quarter, commercial stocks in the OECD countries -- excluding strategic reserves controlled by governments -- amounted to 2.98 billion barrels, according to the IEA's latest report. That was enough to cover 64 days of demand in the OECD, based on the current quarter's consumption.

There is no magic number when it comes to demand coverage, but it is a safe bet that most oil bulls would prefer it to be below 60 days. That's where it stood during the halcyon days from late 2009 to late 2014. Unfortunately for them, there is little prospect of that happening soon, based on current supply and demand projections, as you can see in the chart below -- unless OPEC or some other large producers throttle back quickly (either voluntarily or otherwise) or consumption races ahead of current expectations for next year.

Store Wars
On current projections, OECD oil stocks look set to keep rising through next summer
Source: International Energy Agency, Energy Information Administration, OPEC
Note: Assumes OPEC supply stays constant with 3Q2015 level

In the chart, for good measure, I've added days of forward demand cover implied by the latest supply and demand projections from the Energy Information Administration and OPEC. The analysis assumes that OPEC doesn't cut -- in line with the outcome of this month's meeting -- and that excess barrels flow into commercial tanks in the OECD, so the actual numbers shouldn't be read as gospel. Either way, the bearish trend through much of 2016 is clear. Real rebalancing looks like mostly a 2017 story, at least from this vantage point.

Cutting the amount of storage relative to demand would require a large, and currently unforeseen, supply disruption. If you run the same chart using IEA figures but then also incorporating a cut on January 1 of half-a-million or 1.5 million barrels a day, it looks like this.

Wishful Sinking
It would take a large, rapid cut in supply to bring OECD oil stocks back towards 60 days by next fall
Source: International Energy Agency

Taking out 1.5 million barrels a day of supply would go a long way to draining the storage tanks by the time fall rolls around again. But that would be the equivalent of Kazakhstan's oil industry simply deciding to take most of next year off, which seems unlikely given the tenge is the world's worst performing currency this year. Working off the oil binge is going to take up a lot of 2016.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net