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Why investors are wrong about the oil ‘glut’

Conventional wisdom suggests an oil glut is keeping the price of the Brent Crude down, but who’s to say that the recovery story will not continue?



While it doesn’t seem all so long ago since investors were talking about $100 a barrel, today $50 is the magic number.

Still, as reported by Reuters, analysts have been cutting their forecasts for the first time in six months with little sign of a freeze in global output.

However, says Richard Robinson, manager of the Ashburton Global Energy Fund, while the persistent oversupply that started in 2014 has now accumulated to become the largest OECD inventory surplus on record, the rate at which it has been building is slowing decreasing.

“The completion rate of legacy oil production projects is rapidly slowing and savage spending cuts over the past couple of years are really beginning to take hold,” he explains.

“The oil industry has been losing vast amounts of cash forcing it to aggressively cut capital expenditure. According to Wood Mackenzie, the industry has slashed $1tn in capex through to 2020, creating supply problems towards the end of the decade.”

Complacency with replete inventories and a circa $40 oil price is akin, Robinson says, to being “happy that your fridge is full when nobody is planting any crops”.

From here on in the story of oversupply and high inventories may well be reversed.

A useful source is the Baker Hughes oil rig count which this month shows 464 active oil and gas rigs in the US, compared to more than 2000 in early 2012.