Alex Mills
By Alex Mills
The news from the oil patch is not good.
A dramatic oversupply of crude oil has forced prices from an average of $94 per barrel in October 2014 to $45 today. Cash flow has been cut in half, budgets have been slashed, drilling activity has stopped, people have lost their jobs.
Oil and gas companies that have a high percentage of debt probably are paying more to service their debt than they are making. In those cases, there is not enough capital to re-invest in future development.
So, how big is the oversupply problem?
It is big!
In June (the most current month of crude oil production reported by the Energy Information Administration), Texas produced 103 million barrels. Just four years ago (June 2011), Texas produced 41 million barrels. That’s an increase of 62 million barrels or 151 percent.
Where does all of that excess oil go? It goes into storage. Large tanks holding thousands of barrels of oil have been constructed along the Gulf Coast; at Cushing, Oklahoma, which is a major trading point for crude oil; and on leases.
EIA said U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 4.0 million barrels from the previous week. At 457.9 million barrels, U.S. crude oil inventories remain near levels not seen for this time of year in at least the last 80 years. During the same week a year ago, crude oil inventories were 356 million barrels, or 101 million barrels less than in 2015.
Well, why not just refine as much crude oil as you possibly can to get rid of the surplus?
In theory, when prices decline, demand should increase. Gasoline demand has increased 4 percent this year over 2014, but that’s not going to put much of a dent in that 101 million barrels of surplus crude oil.
U.S. crude oil refinery inputs averaged 16.0 million barrels per day during the week ending September 25, 2015, 241,000 barrels per day less than the previous week’s average. Refineries operated at 89.8% of their operable capacity last week. Gasoline production increased last week, averaging about 9.7 million barrels per day. Total motor gasoline inventories increased by 3.3 million barrels last week, and are near the upper limit of the average range. Both finished gasoline inventories and blending components inventories increased last week, too.
Total commercial petroleum inventories increased by 3.7 million barrels last week. Total products supplied over the last four-week period averaged over 19.5 million barrels per day, up by 1.5% from the same period last year. Over the last four weeks, motor gasoline product supplies averaged about 9.1 million barrels per day, up by 4.2% from the same period last year. Jet fuel product supplied is up 11.8% compared to the same four-week period last year.
As more refined products, such as gasoline, come onto the market, prices will decline. In most places in Texas, retail gasoline price for regular is less than $2 per gallon.
In theory, when prices decline, demand should increase. Gasoline demand has increased 4 percent this year over 2014, but that’s not going to put much of a dent in that 101 million barrels of surplus crude oil.
And this discussion hasn’t even touched on OPEC, lifting of sanctions on Iran, worldwide oil demand, etc., etc.
Unfortunately, there doesn’t seem to be a quick fix.
Alex Mills is President of the Texas Alliance of Energy Producers. The opinions expressed are solely of the author. For detailed crude oil pricing information, go to www.texasalliance.org.
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