The US Federal Reserve has warned that the world is awash with excess oil and starting to run out of places to store the glut, with no sustained recovery in sight for the oil industry until 2017 at the earliest.
Robert Kaplan, head of the Dallas Fed, poured cold water over talk of a fresh oil boom this year and said the US shale industry has taken far longer to cut output than many expected.
“As we sit here today, Dallas Fed economists estimate that global daily oil production exceeds daily consumption by more than 1m barrels per day,” he told the Official Monetary and Financial Institutions Forum in London.
“Excess inventories in the OECD member countries now stand at approximately 440m barrels. This is a record level and has raised concerns about whether there is sufficient storage capacity in certain geographic areas,” he said.
Commerzbank warned that the market is primed for an upset. "We see worrying parallels to 2015, when oil prices rose sharply well into May before collapsing in the second half of the year," it said.
Mr Kaplan, a former banker at Goldman Sachs, said the oil markets have taken “too much comfort” from talk of a production freeze between the OPEC cartel and Russia. The cold reality is that Iran is ratcheting up output towards pre-sanctions levels.
The Dallas Fed’s team of energy experts is closely watched for clues about the health of the shale industry in Texas. Mr Kaplan said the break-even price of oil for US frackers has dropped to $35 to $50, lower than many assume.
He warned that there will be “more bankruptcies” as over-leveraged drillers are flushed out, but this poses no risks to US banking system as a whole. There is no plausible comparison to the subprime financial crisis. “People will lose money but it is not systemic,” he said.
Separately, Mr Kaplan dismissed the near halt in US growth in the first quarter as a temporary blip and issued a clear warning that the Fed is about to tighten monetary policy. “The markets may well be underestimating how soon we might move based on what I have seen. You’ll find the economic data in the second quarter may rebound,” he said.
Futures contracts are pricing in a very low likelihood of a rise in interest rates at the Fed’s next meeting in June, and a mere 61pc chance of any rise by the end of the year. The markets are effectively calling the Fed’s bluff, a risky assumption as China comes back to the boil and the emerging market worries subside.
Robert Kaplan, head of the Dallas Fed, poured cold water over talk of a fresh oil boom this year and said the US shale industry has taken far longer to cut output than many expected.
“As we sit here today, Dallas Fed economists estimate that global daily oil production exceeds daily consumption by more than 1m barrels per day,” he told the Official Monetary and Financial Institutions Forum in London.
“Excess inventories in the OECD member countries now stand at approximately 440m barrels. This is a record level and has raised concerns about whether there is sufficient storage capacity in certain geographic areas,” he said.
Floating storage for crude is spiking, a possible sign of trouble CREDIT: DEUTSCHE BANK
Oil prices have surged by 80pc since touching bottom at $26 in mid-February. West Texas crude reached a five-month high of $46.70 this week.
Speculative long positions on crude oil have risen to all-time highs on the futures markets, a sign that the rebound may have lost touch with fundamentals. There is an armada of tankers building up in the North Sea, while the latest loading data from China show that May deliveries are falling.
“We think China has for now stopped filling its strategic petroleum reserve. They have filled up the sites,” said Ian Taylor, head to the giant trading group Vitol.
Oil: who are the world's biggest producers?
Oil prices have surged by 80pc since touching bottom at $26 in mid-February. West Texas crude reached a five-month high of $46.70 this week.
Speculative long positions on crude oil have risen to all-time highs on the futures markets, a sign that the rebound may have lost touch with fundamentals. There is an armada of tankers building up in the North Sea, while the latest loading data from China show that May deliveries are falling.
“We think China has for now stopped filling its strategic petroleum reserve. They have filled up the sites,” said Ian Taylor, head to the giant trading group Vitol.
Oil: who are the world's biggest producers?
Commerzbank warned that the market is primed for an upset. "We see worrying parallels to 2015, when oil prices rose sharply well into May before collapsing in the second half of the year," it said.
Mr Kaplan, a former banker at Goldman Sachs, said the oil markets have taken “too much comfort” from talk of a production freeze between the OPEC cartel and Russia. The cold reality is that Iran is ratcheting up output towards pre-sanctions levels.
The Dallas Fed’s team of energy experts is closely watched for clues about the health of the shale industry in Texas. Mr Kaplan said the break-even price of oil for US frackers has dropped to $35 to $50, lower than many assume.
He warned that there will be “more bankruptcies” as over-leveraged drillers are flushed out, but this poses no risks to US banking system as a whole. There is no plausible comparison to the subprime financial crisis. “People will lose money but it is not systemic,” he said.
Separately, Mr Kaplan dismissed the near halt in US growth in the first quarter as a temporary blip and issued a clear warning that the Fed is about to tighten monetary policy. “The markets may well be underestimating how soon we might move based on what I have seen. You’ll find the economic data in the second quarter may rebound,” he said.
Futures contracts are pricing in a very low likelihood of a rise in interest rates at the Fed’s next meeting in June, and a mere 61pc chance of any rise by the end of the year. The markets are effectively calling the Fed’s bluff, a risky assumption as China comes back to the boil and the emerging market worries subside.
The oil rig count in the US has collapsed but output has not dropped nearly as muchCREDIT: BANK OF AMERICA
The Dallas Fed’s in-house indicator of underlying price pressures for the US – trimmed mean 12-month PCE inflation – has broken out from its depressed range over the last two years and has ticked up to between 1.8pc and 1.9pc. This needs watching but is unlikely to lead to a spike in inflation.
Mr Kaplan said profound global forces have stripped companies of their power to set prices across a range of industries and sectors. The first leg was the integration of China into the world economy: the second leg today is technological ‘disruption’.
Together they have created lasting deflationary headwind that allows the Fed to target a lower unemployment rate than in the past. Even if the Fed tightens hard this year, the message is that rates may not return to historic levels for at least a decade. It is a Japanese world.
The Dallas Fed’s in-house indicator of underlying price pressures for the US – trimmed mean 12-month PCE inflation – has broken out from its depressed range over the last two years and has ticked up to between 1.8pc and 1.9pc. This needs watching but is unlikely to lead to a spike in inflation.
Mr Kaplan said profound global forces have stripped companies of their power to set prices across a range of industries and sectors. The first leg was the integration of China into the world economy: the second leg today is technological ‘disruption’.
Together they have created lasting deflationary headwind that allows the Fed to target a lower unemployment rate than in the past. Even if the Fed tightens hard this year, the message is that rates may not return to historic levels for at least a decade. It is a Japanese world.
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