Recently, the oil markets dropped a whopping 4.5% on the news that the U.S. had an inventory build of 9 million barrels -- despite the fact that the U.S. accounts for only 16% of the market.
In this clip fromIndustry Focus: Energy,Motley Fool energy analysts Sean O'Reilly and Taylor Muckerman talk about one possible explanation for why the market reacted so strongly to the news, and what an oil build means in the greater context of the sector today.
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A full transcript follows the video.
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This podcast was recorded on March 23, 2017.
Sean O'Reilly:The other thing was, I think the day I had him on,there was another inventory build. I think it was just under 9 million barrels, it was unexpected,everyone was freaking out, oil fell4.5% that day. And Crowe and I chatted about it, and his point was, theUnited States oil market in terms of consumption and, therefore,very closely tied to Cushing --
Taylor Muckerman:WestTexas Intermediate pricing at Cushing, yeah.
O'Reilly:It's16% of the oil market. That's a lot, cool. But this is nottheoil market.
Muckerman:Yeah, OPEC still reigns supreme.
O'Reilly:Well, no, his point was,everybody is worried about oversupply here, andit's being stored here, but his point was,the market fixates on U.S. supply and storage herebecause this is the only good data we have. For example, China's oil production is down 7%. But do we trust that? Wedefinitely don't trust the Saudi Arabian numbers. They're all checkingeach other, or whatever, I don't know what that means.
Muckerman:Yeah.I don't know if we have any necessary reason -- just because a U.S.government agency isn't able to validate it, doesn't mean that it's not true.
O'Reilly:Right,but it also doesn't mean --
Muckerman:Maybethey're thinking the same thing about our inventory numbers.
O'Reilly:Fine. Itjust seems odd todrive the price down of a globalcommodity, that arguably, our economy needs right now, down by 4.5% in a single daybecause of the inventory numbers in one market thatrepresents 16% of the global market.
Muckerman:Well,I think it's because of the fact that --
O'Reilly:This has a "Mr. Market" Benjamin Graham feel to it, is the point.
Muckerman:I think maybe prices took a nosedivebecause they weren't all that highto continue to build inventory. That just means that thesecompanies really don't care if oil is in the $40 range, they'regoing to continue to produce. It also means thatdemand isn't soaking up the new production. So,you look at, the IEA came out recently andsuggested that oil demand growth -- not oil demandoverall, but oil demand growth -- will slow in 2017 versus 2016. So, you had around 1.6 million barrels per day of newdemand growth last year. They suggest only 1.4 million barrels of new demand growth this year. Meanwhile, the U.S. is likely going to produce 1 million more barrels per day, which isalmost the entire new demand growth. And if OPEC wanted to,they could just reverse the cuts that they have, and that would totally absorb and likely oversupply the market.Goldman Sachssuggests that that's going to happen in 2018 or 2019 or 2020,when the historic spending of the early teens catches up to usbecause of the megaprojects that were spent on 2011, 2013 --
O'Reilly:So,those aren't on line yet, to your knowledge.
Muckerman:They'recoming on line. But the bulk of them will be in full forcein the next few years. And these are the projects that have a long life span compared to shale oil.
Sean O'Reillyhas no position in any stocks mentioned.Taylor Muckermanhas no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has adisclosure policy.