Oil market over the last year - inventory adjustment

The simple table tells us what has happened to the oil market in the last year. The action is all in the whippiness of the futures curve and it has all been in the volatile action of the front-end. The ongoing oil move was more than a short-term logistical supply-demand dislocation, but one of the reasons for the lack of production slowdown is that producers make longer-term decision based on longer-term expectations. In the longer-term, supply and demand will be in balance. 

A year ago we were looking at a significant market backwardation. This switched to a significant contango market. This was associated with a shortfall in demand without any changes in US and OPEC production. The demand shortfall led to a inventory build which can only be cleared through lowering prices. This will increase refinery and end user demand, but can only be fully adjusted if there is an increase in demand that is greater than the shortfall. The demand increase has to work off the inventory build. The curve gets less steep further out in time because that is the time necessary to work-off the inventory build. In the futures expectations market, the high production will not completely offset by demand even in the long-run which is why longer-dated futures have fallen. 

We are not trying to explain all of the action in the oil market other than to say that supply and demand shocks will lead to inventory changes that will be reduced through the price adjustment process. This will cause a more immediate reaction in the short-run because of inventory constraints. In the longer-run, inventory adjustments will not play as significant a role.