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The Truth About 2016 Oil Supply and Demand (It’s Not What You’d Expect!)

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Raise your hand if you are an investor in oil companies and mentally exhausted from the market downdraft of 2015.

Both my arms are in the air.

But I haven’t given up. And I am going to tell you why…

Data Point 1 — Since May, American Inventory Movement Has Normalized

If I did nothing but read oil glut stories on the Internet and watch CNBC, I would have no optimism for an oil recovery… ever.

Last month, there was an enormous amount of media coverage of a growing oil “glut.”

I don’t dispute the fact that there is a lot of oil in storage around the world. But I do dispute the fact that the glut is worsening. What I’m seeing in the data suggests that changes in inventory levels have pretty much normalized since May.

I went to the EIA website and pulled out weekly data on crude inventory levels dating back to the start of 2010. What I wanted to determine was what inventory movements looked like in the U.S. in 2015 relative to prior years.

Here is what I found:

This graph requires some explanation. The black columns are inventory changes in 2015. The blue columns are the average inventory changes for the years 2010-14.

Q1: A huge increase in inventory in 2015 (90 million barrels) relative to the average increase from 2010-14 (25 million barrels). There is no doubt that the market was oversupplied in the first quarter. This quarter is the primary cause of the huge amount of oil in inventory.

Q2: Inventory levels in 2015 actually decreased slightly (6 million barrels) this year relative to a very small inventory increase (6 million barrels) in the average year from 2010-14. There does not seem to be an unusual oversupply in the second quarter.

Q3: Inventory levels this year came down by 7.5 million barrels this year, which was less than the 19 million barrels that 2010-14 averaged. This year is a little worse than normal, but not much.

May 1-Oct. 31: The inventory change in the U.S. in 2015 is virtually identical to the 2010-14 average. The amount of oil going into storage since May 1, 2015, does not suggest that oil supply and demand are out of balance at all.

What these U.S. storage levels say to me is that yes, we have too much oil in storage but that it all came from the last couple of months of 2014 and the first four months of 2015.

The glut is not getting worse in the United States.

Data Point 2 — Global Inventories Have Also Been Normal Since May

What does the rest of the world look like? I found some more encouraging data in the November OPEC Monthly Oil Market Report:

The green and brown columns in the chart above represent how much above…