One Piece at a Time - U.S. Crude Oil Prices, Inventories and the Supply/Demand Balance

The latest sharp drop in crude oil prices, which was blamed in part on unexpected gains in already record-high U.S. inventories, is a stark reminder of the importance of understanding and routinely calculating estimates of the oil supply/demand balance. Only by keeping up with the ever-changing relationship between crude availability and crude consumption—and by anticipating shifts in that relationship—can oil traders and others whose daily success or failure depends on crude pricing trends make informed decisions. Today we begin a blog series on the modeling of U.S. crude oil supply and demand, and the sourcing of input data.

For three solid months, from the first week of December 2016 through the first week of March, the end-of-day NYMEX price for benchmark West Texas Intermediate (WTI) remained consistently within a relatively narrow band—roughly $53 to $56/bbl, give or take a few nickels at the top and bottom—and during much of that time the price-band was even narrower. Then, on Wednesday and Thursday last week (March 8 and 9, 2017), the price of WTI plummeted 7% and closed below $50/bbl for the first time since OPEC’s members agreed (on November 30, 2016) to reduce their collective output by 1.2 million barrels per day (MMb/d) starting in January 2017—see Is This the Real Life? Russia and a number of other producing countries not part of OPEC agreed to another 600 Mb/d in production cuts. (Whether they will make good on their promises remains an open question.)

Though Americans are sometimes accused of thinking that all that matters ends at our shores, the U.S. oil market is dominated by what goes on overseas. Changes in crude demand in China, events affecting production in the Middle East and the like will move crude prices everywhere—the world market for crude is totally interconnected. The focus of this blog series, though, is on the supply/demand balance in the U.S., which from an analytical perspective is a more manageable beast to tame and get to know. Besides, the U.S. really does play an outsized role in the global market, especially in the Shale Era (as we’ll get to in a bit), when U.S. can respond quickly to crude pricing shifts by ramping up (or pulling back on) oil production.