The bull case for oil

THERE is a perception that global crude markets are significantly oversupplied. Markets are indeed oversupplied today. They have been for nine months - firstly, as reduced US imports left a surplus of crude in the Atlantic basin and latterly, as Libya's oil production exceeded expectations despite a civil war in that broken country.

But the quantum of oversupply is not what you might expect given the scale of price retracement, namely 0.75 million barrels per day (mnbd) in a global daily market of 92 mnbd. A reasonably large chunk of the surplus was absorbed by Chinese strategic inventory building through mid-2014. But as the oversupply grew in late Q3 2014 with surging Libyan volumes, inventories began to pile up in commercial storage facilities, pressuring physical markets lower.

As the markets peer into the near future, the modest oversupply remains in place today, not improving or worsening. Key agency forecasts illustrate the general consensus that forecast growth in demand and supply in 2015 are largely in balance, so no change is currently baked in to the modest current market oversupply situation.