Crude Oil Market Watch: $100 Is Impossible

It’s almost the aniversary of the OPEC decission not to cut production. This surprise move sent a shockwave over the oil market. A year after Saudi Arabia upended expectations by refusing to prop up the crude oil market, watch speculation on when prices will recover. Will it fall to $20 or rise back to $100.

With $100 for crude oil fresh in our memories, it’s not hard to imagine a run back toward triple digits. But when you watch the numbers, it will be very difficult – if not impossible – for crude oil to rise back above $100.

The West Texas Intermediate crude oil market is trading around $42. A rise to $100 implices a rally of about 140%. On a year-over-year basis, that sort of rebound has happened only once in the past three decades, between February 1999 and February 2000.

A +50% drop in oil prices, like we saw this time, has happened only twice in the past three decades: the oilcrash of 1986 and during the financial crisis in 2009. After those significant drops, the rebound maxed out at 80%. This is not even close to 140%.

Crude oil market: watch the over supply

Today, excess supply as OPEC’s own members and rival producers battle for market share is weighing on near-term prices for barrels.

There are almost 3 billion barrels of oil held in commercial inventory in the OECD countries. The International Energy Agency calls that buffer of inventory “unprecedented.” US inventory is back tot he level not seen since 1985.

OECD oil stocks spent most of the past six years covering less than 60 days of demand. Recently, they have spiked into the mid-60s for the first time since the financial crisis, hitting 64 days in the third quarter.

Assuming OPEC maintains its output at third-quarter levels of 38.3 million barrels a day, another 375 million barrels of oil would flow into storage globally between the end of September and June next year. Without a production cut OECD inventory stocks would rise above 70 days.