Oil is a cyclical commodity that moves in multi-year and multi-decade cycles related to the supply/demand balance. I believe that the key long-term driver is the industry’s capital investment cycle. We are following up a period of extreme levels of capital investment in the sector, and I do not believe that the effects of this quite large capital infusion have been fully exploited and utilized just yet, as the assets used for extraction and transmission of the hydrocarbon molecules tend to have very long functional lives. The charts and graphs below are presented to show where we currently are in the cycle, with context around longer-term inventory and production levels.
United States Production
United States production has grown 130% in less than 10 years, from approximately 5.4MMbbls/d to 12.0MMbbls/d. Peak Oil Theory suggested that the supposed secular decline in U.S. production was emblematic of a more significant worldwide peak in total production that had been reached, or would be shortly. The combination and application of directional drilling and hydraulic fracturing to U.S. tight oil deposits appears to have disproven peak oil for the U.S., or at least pushed it significantly into the future.
United States Inventory vs Production
As you can see, over the long run, U.S. inventory levels have been quite stable. Inventories increased moderately, as prices rose dramatically during the mid to late 2000s. Domestic inventories hit multi-year peaks in 2010 and 2011, but then exploded much higher in 2015-2016. Inventory levels dropped as U.S. drilling activity slowed, but remained at historically elevated levels and began increasing again toward the end of 2018.
United States Imports
The impact of the shale drilling wave can clearly be seen in U.S. imports as well. The only major exporter to the U.S. to increase shipments to the U.S. during this time was Canada. Overall, imports from countries with major exports to the U.S. are down 33% from their annual peak in 2005. December 2018 data was not yet available as this post was being composed, so these results will moderate just a bit.
United States Inventory vs Production vs Imports
Combining the trends for U.S. Inventory, Production, and Imports into a single graphic paints a compelling picture of current oil market dynamics and offers a suggestion of how things may play out going forward. The drastic increase in production and inventories, combined with the dramatic reduction in inventories implies that foreign producers, including OPEC, will be under significant pressure to maintain production levels and market share.
Disclaimer: I own put options on SOXX, which are expected to go up in value if a market correction occurs, and expect to sell or add to the position at any point in time.
I am not a financial services professional. All information on this site should be regarded as informational or for entertainment only, and not as actual investment advice.