Oil: Demand is just as important as supply

​Slowing Oil Demand Might Make a Freeze Deal Moot

​More below.

I have been discussing the fading world economy, and how it will soon dry up oil demand for more than a year. The oil bulls have been studiously ignoring issue, while continuing to go all in on every whisper of a supply freeze. I would feel for them, but anyone that stupid deserves to be brought up short, as they have been.

"The IEA—which advises oil-consuming countries on their energy policies —blamed “wobbling” Asian oil demand and falling oil consumption in Europe for much of the change. The Paris-based agency downgraded its global oil-demand predictions by about 100,000 barrels a day for this year—although it is growing by 1.3 million barrels a day. It also reduced the forecasts by about 200,000 barrels a day in 2017, with consumption increasing more slowly at 1.2 million barrels a day. […]

The IEA’s closely watched monthly oil-market report marked an abrupt shift for an agency that a month ago said the world’s oil glut had begun disappearing. The Organization of the Petroleum Exporting Countries also surprised the market this week with a report that oil production outside the cartel was proving more resilient than expected."

This is purely economy driven, we have yet to see the self drive cars intrusion into the oil market, or the natural gas intrusion into the US fleet vehicle market. After all, Coke trucks, UPS cars, and other fleets running on natural gas would be cheaper, and less polluting than gasoline. Even with low prices gasoline, it seems likely that some fleets will switch to natural gas as a protective measure against future oil price spikes. 

There is nothing in the world's economy which points to an upwelling in growth, which would amount to a serious change in the demand curve for oil. Further, US shale oil suppliers are beginning to cap more wells awaiting a price increase before pumping more oil. Plus, new finds, and continuous technique improvements have begun to lower the break even price point for many oil fields. All of this means that the US is simply waiting to pump more oil once there is a significant price increase.

All of these factors are likely to press oil prices down. The instability issue has also mostly gone away as a reason for oil price increase. It used to be that instability meant that the oil supply from the unstable region made a negative supply imbalance worse. Today we find that even during periods of instability like war, the oil flows, it is too valuable, and the participants in the war all continue to maximize production.

Expect oil prices to continue to fade. Expect the oil bulls to continue to hyperventilate over every ephemeral supply stricture. Until the world's economy rights itself there will be no other way forward.