In my last article for OilPrice.com (May 16, 2016), I laid out my reasoning for a prediction that the Global Oil Markets would soon be back in balance. Picking an exact date when an oil cycle will end is difficult, but they do call them “cycles” for a reason. This cycle is no different than all of the others that came before it. Oil producers and consumers respond to price changes, which brings supply & demand back into balance, just like they always do.

The last six major oil price cycles lasted an average of two years. This one started in July, 2014.

On June 14, 2016 the International Energy Agency (IEA) issued their monthly Oil Market Report. In the report the IEA revises their first quarter increase in global demand forecast from a 1.4 to 1.6 million barrel per day year-over-year increase. They are also forecasting a big spike in demand of 1,270,000 barrels per day from the 2nd quarter to the 3rd quarter. Since demand ALWAYS spikes in the 3rd quarter, this was not a surprise to anyone.

Since this cycle has been so severe, I predict that it will not end well for speculative traders that continue to short oil futures. If some of you purchased a gas guzzling SUV because you believed the talking heads that said oil would never sell for $100/bbl again, you may want to consider a smaller second car.

• Global oil production in May was 590,000 barrels per day less than it was a year ago.

• Nigeria’s oil sector is under attack and the situation seems to be getting worse

• OPEC production fell by 110,000 barrels per day as increases in Iranian production were more than offset by big losses in Nigeria, Libya and Venezuela

• Global demand is up 1,600,000 barrels per day year-over-year as Chinese demand has held up and demand from India is very strong

Canadian wildfires at their peak took 1,500,000 barrels per day off the market. This production should be restored in the 3rd quarter. The situations in Nigeria, Libya and Venezuela are much worse. Inf fact, there is now concern that the government in Venezuela may collapse under the debt load created by low oil prices.

The direction of the oil market should now be crystal clear to everyone. Demand growth is relentless. The products refined from oil are essential to a high standard of living on this planet. We will all complain when gasoline is back over $3.00/gallon, but we will continue to pay for it. Within 6 to 9 months, demand for oil should exceed production. High storage levels provide a cushion, but oil prices will continue to ramp higher.

David Fuller's view

Dan Steffens is correct in saying that there is always an oil cycle.  In fact, commodities have long been among the most cyclical of all markets.  He is also right in saying that demand for oil is clearly rising – have a look at the graph in his report.  Yes, production of oil is falling as demand is rising.  That is what happens in a cyclical commodity market. 

However, Dan Steffens is also overlooking some important factors, one of which is even more important than all of his bullish points combined. 

Consider the common sense adage: the cure for high prices is high prices.  For most of 2011 until the second half of 2014, Brent Crude ranged mainly between $100 to $120 a barrel, thanks to OPEC’s discipline in capping production.  That led to a global search for new oil supplies.  More importantly, it encouraged the development of new oil production technologies, including deeper offshore drilling, horizontal drilling and hydraulic fracturing (fracking). 

Even more significantly in terms of long-term potential, high oil prices and rising CO2 emissions also led to the development of new technologies for renewable energies such as solar power and wind farms.  Technology also led to more efficient use of energy.

Supplies of oil were rising faster than demand in that 2011 to 2014 period and OPEC was losing control of the pricing mechanism.  Saudi Arabia, under pressure from US fracking and afraid of losing market share, increased its oil production, hoping to wipe out high-cost competitors.  First, however, other major producers were forced to increase their own production to maintain revenues, but this only worked for a while because the price of crude oil kept falling and above ground reserves reached record levels.    

Now consider the common sense adage: the cure for low prices is low prices.      

Significantly lower oil prices led to increased political instability in less efficient oil exporting countries, as we have seen most notably in Venezuela, Nigeria and also Brazil.  Some Middle Eastern countries have seen portions of their oil production facilities destroyed by war.  Higher cost US fracking slumped as prices fell below $60.

With sharply lower oil prices demand began to increase.  China, despite its economic problems, vastly increased its above ground reserves.  US consumers drove more and purchased larger vehicles which used more gasoline. Demand for gasoline will remain high during the western summer season.  Canada’s forest fires in the tar sands region have reduced the country’s oil production.  Previous short sellers are now long crude oil as trend has clearly changed.   

Nevertheless, will oil prices rise to anything like the 2011 to 2014 range?  I do not think so because US fracking is likely to increase progressively once producers see it holding above $60.  Other countries will be tempted to commence their own fracking as the cost of importing oil increases. 

Lastly, have a look at the OilPrice.com site on which Dan Steffens article is posted.  It is full of bullish stories, which attract advertising and other business deals with oil industry companies.  Any commodity site, whether for crude oil and gas, gold or diamonds and other gems will have a preponderance of bullish articles.  Commentators on these sites are always bullish because that is what their customers want.