Energy Analyst Explains Connection Between Oil Price, Supply/Demand Curve

By North American Shale magazine staff | May 11, 2017

Oil prices should not be used to explain the global oil supply and demand picture, according to Dave Pursell, managing director and head of macro research at Tudor, Pickering, Holt & Co. As to why oil prices shouldn’t drive the global oil supply and demand narrative, Pursell noted that demand wasn’t that great when oil was trading in the $130/b range in the late 2000s. Instead, analysts and onlookers should follow the forward oil futures curve. The shape of the curve and the trajectories of oil inventories are more important than the current price of oil, he said.

The shape of the curve creates incentives for buyers and sellers to hold or move product. The current curve shows that by the end of the third quarter, inventories could be back to normal as buyers look to purchase and utilize stock. According to Pursell, the demand for oil is getting better at the same time inventories are being drawn down. “This isn’t a faith-based argument,” he said, “this is a fact-based argument.”

Global events that receive media attention are also another variable that often has little impact on the supply and demand picture. When Greece was undergoing a time of major economic and country stability turmoil some believed the country’s distress would disrupt the price of oil. Through internal research, Pursell’s team showed that Greece was only slightly more important to the global oil picture than the state of Rhode Island was.

 

**Side bar**
Understanding The Oil Futures Curve
For Dave Pursell, the oil futures curve can be used to determine future oil prices. Because of contago and backwardation, oil prices appear to be trending towards the $65/b range by the end of the year.

Backwardation occurs when the price of an oil futures contract is currently trading below the expected spot price at the time when the contract will mature or expire.

Contago is a term used by traders to explain a scenario that futures contracts will rise in the future. For example, when an oil market experiences contago, it is expected that a contract to buy crude one month from now costs more than the current price of oil.