The Energy Report - Oil and Gas Glut

By Roger Baettig | April 12 2012 9:30 AM

If the International Energy Agency tells you that the market is well supplied, you had better believe it. The agency that represents 28 consuming countries always wants to error on the side having too much oil as opposed to not enough. The IEA is now saying that after more than two years of steadily tightening oil, market conditions appear to have reversed. It seems as the producers of oil got prepared for the loss of Iranian oil so they increased global oil inventories by an impressive 1.2 million barrels a day in the first quarter. That oil has been hoarded by many countries in Europe and Asia and the EIA pointed out that China put away about 700,000 barrels of oil a day into their reserve and Saudi Arabia is storing an additional 500,00 barrels per day. In fact the Saudis are asking for more customers, telling anyone who wants to listen that they have more oil for sale.

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While European and Asian oil hoarding has slowed a bit, demand is more geared towards the higher grades of crude. European and Asian refiners prefer higher quality crude and because North Sea production is struggling, they are looking more to North Africa. Of course the war in the Sudan and Syria and uncertainty in Nigeria is keeping a premium on the high grades. The IEA says that Non-OPEC oil production shut down due to technical or political problems rose by 500,000 barrels a day to 1.2 million barrels a day and that the North Sea and Canada represented the largest part of the decrease.

OPEC agrees. It seems that for a change OPEC, the perceived leader of producing nations, and the IEA that rarely agree do so this time. OPEC said its production increased by about 136,000 barrels a day in March to 31.3 million barrels a day. In other words, in OPEC's mind they are producing about 1.3 million more barrels per day than they are actually selling.

In the US, oil supply is near a 22 year high. It should be no wonder why global supply is rising. This is close to the most over supplied market that we have seen since 2008 after the crash.

Of course the oil glut is mere child's play compared to the mother of all gluts in the natural gas market. The question is whether or not the daily injection report can save the price from total collapse. While on the Fox Business Network, listening to some other opinions on this market, I really do not believe that people are understanding the historic nature of what is happening in this market. For example, trying to look at traditional relationships between oil and gas is a waste of time. The old metrics just don't work in the new world of fracking. With new wells producing more, we can get more gas with less drilling and at substantially less cost. Natural gas traded below $2.00 for the first time in a decade. The Wall Street Journal and AP laid out all the interesting facts. They said that the falling price of natural gas has been a boon to homes and businesses that use the fuel for heat and appliances, and for manufacturers that use it to power their factories and make chemicals, plastics and other materials. From October to March, households spent $868 on average on natural gas, a decline of 17 percent from last winter. Those savings have helped to relieve the burden of rising gasoline prices. Households spent $1,940 on gasoline from October to March, a 7 percent increase from the same period a year ago.

There is so much natural gas being produced - and is still in the ground - that drillers, policymakers, economists and natural gas customers are trying to figure out what to do with it. Traders are too. Fun facts on nat gas! All-time low: $1.32 , Jan. 13, 1995. All-time high: $15.30, Dec. 5, 2005. The 10-year average: $5.96/Average price in Asia: $15.90 /Average price in Europe: $9.37.

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