Why Is The Oil Market Taking So Long To Recover?

It’s now been more than two years since WTI crude oil traded above $100/bbl, but the global oil market is still far from balanced. WTI prices have rebounded significantly from multi-year lows of $26.05 back in February, but U.S. crude oil now seems to have lost the momentum that carried it as high as $51.67 back in June. Since then, prices have dipped back below $45.

Why is the global oil market taking so long to regain its mojo? According to Reuters oil analyst John Kemp, the oil market must first overcome its downward inertia.

“Rebalancing the oil market is proving a long and frustrating process because the oil-exporting countries hit hardest by the slump were themselves some of the fastest growing oil consumers before prices tumbled,” Kemp wrote last week.

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When oil revenues began to tumble, the economies of these oil-exporting countries were hammered, and their demand for oil subsequently dried up, compounding the problem.

In other words, the massive supply glut caused the problem, and now some of the world’s largest sources of oil demand growth have gone away, leaving the developed world to pick up the slack.

The world hasn’t been able to digest the glut via demand growth from these economies, and instead has been forced to rely on production cuts and relatively weak demand growth from more advanced economies like India and China.

Although the struggling economies of oil exporters has been a huge headwind during the rebalancing process, Kemp notes that these economies will likely fuel the fire once the oil market has rebalanced.

“Once prices start rising significantly, however, the market is likely to tighten faster than many analysts expect because oil consumption in emerging markets is likely to accelerate again with the extra oil revenues,” Kemp concluded.

So far this year, the United States Oil Fund LP (ETF) USO is down 8.1 percent.

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Disclosure: The author holds no position in the stocks mentioned.