We are currently seeing oil prices fall as the world seems awash in oil. By any reasonable view, supply exceeds demand. How true is this?
The International Energy Agency estimates global demand for crude at 96 million barrels of oil per day (b/d). They point out that crude production breached 97 million b/d in late 2015. So the world has an excess oil production of about 1 million b/d. (The US Energy Information Administration estimates global oil inventories increased by 1.3 million b/d in November 2015)
Much to the annoyance of OPEC, the US fracking industry has become the swing producer. Whereas Saudi Arabia has traditionally been the producer with the critical mass to increase or decrease production to maximize the market price for a given demand, that role was usurped when the fracking industry started to generate large amounts of oil. The US fracking industry productivity has risen by 50% over the past five years. Moreover, this technology will be exported to other oil producing regions, ensuring rising production.
The US-based U.S. Energy Information Administration shows US crude production at 8.7 million b/d for 2014. For the first nine months of 2015 consumption was up 3% compared to 2014 but domestic production grew nearly 17%. The consumption forecast for 2016 is an anemic 0.6%. Projected U.S. crude oil production averages 9.3 million b/d for 2015 and 8.8 million b/d in 2016. The oil glut looks to stay around for a while.
Cheaper oil is putting more cash in consumer pockets, which is then spent on other items. But cheaper oil has also meant growing consumption. But countering that trend are newer and more fuel efficient automobiles, including hybrids, that have taken a larger share in the market and improved overall fuel economy as old gas guzzlers are replaced with modern technology. While some feel that 0.6% increase in consumption might be way too low, technology continues to lower demand. Plus, the excess supply situation could be exacerbated by the softer Chinese economy.
However the US fracking output is going almost certainly going to keep US prices low.
And if the following chart tells us anything, global supply is also looking more robust than demand. If China does slow down, as many expect, the oil market imbalance will grow.
In summary, cheaper oil is excellent news for the airline industry worldwide. The juicy profits are likely here to stay. Moreover, airlines can be expected to sit on older aircraft for a while longer because the fuel cost is simply not as much of an issue. Industry load factors are strong and fares are not coming down in sympathy with oil prices.
Of course the longer this excess supply of oil continues, the more those huge backlogs at Airbus and Boeing start to look fragile. If the industry was certain that oil prices will remain low, we would likely see a series of delivery push-backs and deferrals, just as Boeing and Airbus are ramping production rates to record levels.
Should a war break out between Iran and Saudi Arabia, all bets will quickly be off, as the Middle East remains a powder keg. But the US should be relatively secure, with its production capacity, so we might not see $80-$100 per barrel oil again for a decade – good news for airlines and consumer wallets.