OPEC has decided against reducing output, so the plunge in oil prices is likely to continue. The market looks like it will be oversupplied by 1 million to 1.5 million barrels of oil per day next year, as long as OPEC refuses to budge. However, the supply and demand situation could shift the other way rather quickly, driving the price of oil back up before too long.
Demand has trended up
The world needs only meager demand growth for oil to eliminate the current supply glut. As the following slide from a recent Whiting Petroleum (WLL) investor presentation shows, just maintaining the current global demand growth trajectory would require 7 million additional barrels of oil per day of supply by the end of the decade.
Source: Whiting Petroleum Investor Presentation.
It won't take long to sop up the oversupply in the market as long as demand maintains its historical growth rate of 1% per year. Should demand for oil increase to 2% we'd need an extra 14 million barrels of oil per day by the end of the decade. For perspective, North Dakota's Bakken shale play, where Whiting Petroleum operates, only produces about 1 million barrels of oil daily, so the world would need 14 more Bakken-sized plays to meet that increased demand.
The other thing to keep in mind is that U.S. oil demand has picked up in recent years -- up 4% (about 750,000 barrels per day) in less than two years ending in September, as shown in this slide.
Source: Whiting Petroleum Investor Presentation.
Falling oil prices are driving down the cost of gas, That eases the strain on American drivers who are paying less at the pump. This could create even more demand for oil and gasoline, as drivers are less likely to let gas prices impact driving decisions. This is why it's quite possible that demand for oil will trend higher than its most recent historical growth rate.
The supply story is boom or bust
The other side of the oil story is supply, which has surged in the U.S. thanks to shale. From 2009 to 2014, the United States added a stunning 5.5 million barrels of oil production per day. The Bakken shale alone contributed nearly 1 million barrels daily to this increase, as this chart shows.
Source: Whiting Petroleum Investor Presentation.
It is worth noting that if not for surging U.S. oil supplies we'd probably be in a whole lot of trouble, as global oil supplies from several key producing regions have steadily fallen over that same time frame. As we see in this next slide, production is down about 10% across several major oil production centers.
Source: Whiting Petroleum Investor Presentation.
These declines will likely continue, as regions noted on that slide don't have a whole lot of production growth left. The North Sea has been an awfully tough area for producers as legacy oil fields continue to decline, while it's quite costly to bring on new supplies. Brazil has faced its own challenges in bringing new oil supplies online. Finally, OPEC member Venezuela is struggling financially and had pushed for the cartel to cut production to support the high oil prices it needs to fund its economy and to invest in new oil production. Basically, the supply picture outside the U.S. is rather questionable at the moment, and that will only grow worse if oil prices remain low.
Investor takeaway
Right now, the oil market is oversupplied by about 1.5 million barrels of oil per day. However, that glut of oil should be sopped up by demand growth very shortly. Meanwhile, supplies around the world are declining, and could fall further due to lower oil prices. This all suggests the plunge in oil prices could be short-lived; supply and demand could flip faster than anyone expects.
