On cue, Libyan oil output fell by a third, showing the vulnerability of existing supply. That exposure is not in the current oil price.
Markets think about theme at a time and then overreact when directed to another risk. The pendulum swings too far each way.
The real news was a December 2016 oil price deal between the Organization of Petroleum Exporting Countries (Opec) and other oil exporters. Markets expected another failure or token cuts followed by producers immediately cheating on their pledges. It turns out they were out of touch with changed Saudi thinking.
Opec, led by Saudi Arabia, Kuwait, and the UAE, committed to a 1.4m barrel/day cut, helping turn a market surplus into a supply deficit. The cuts were aimed at high stock levels in the US, and is the first time Saudi Arabia has been so market-focused.
As a result, the oil market is now in deficit. Inventories are falling. But this insight is not yet in the current oil price.
Much of market consensus is not supported by the numbers.
Since 2004, the oil price has driven by speculative transactions which are now nearly 30 times the level of trades in physical oil. Most market watchers think that US output will grow with higher oil prices.
However, events already in train mean that US fracking output will fall by 1.5m barrels/day over the next 18 months. It takes time to fund, permit, mobilise, drill, frack, and transport oil.
Sometimes commentators say that “the oil price is weak because of shale gas”. Yet, the crude oil price has little to do with shale gas. They are two different markets.
Commentators say that “the oil price is weak because of increased fracking”. In fact, most of the recent surge in US oil production has come from the Gulf of Mexico.
Output peaked in January 2015 and has been on a steep decline until recently. Fracking output is falling because output lags investment by 12 to 18 months.
Vulture capitalists can buy cheap oil assets but can only get into production quickly if recently fracked.
Operating costs have crashed but much of this is due to marginal-cost pricing by desperate service companies. Eventually, they will have to replace capital equipment.
Nearly 30 times as much oil is traded as burnt, so the oil price is driven by speculation rather than supply and demand.
Because of new Asian markets old statistical models based on the industrialised economies have become unreliable.
The US Department of Energy has underestimated demand growth and over-estimated US fracking production since 2015.
The International Energy Agency corrects its numbers retrospectively but without correcting its models. Experience says that “missing oil” never appears. It always turns out to be understated consumption.
Current oil demand seems price insensitive, and inelastic. But how to explain the final change in Opec’s attitude after two years of denial?
All major Opec exporters are running deficits and eating rapidly into their reserves. Saudi Arabia has burnt $10bn (€940m) a month due to social welfare, subventions to countries like Egypt, military spending, and funding the Yemeni conflict.
Saudi Arabia needs $88 a barrel to break even. Most Opec exporters are worse off. The risks and pain of cutting output were better than engaging in a price war.
An output cut of 4% yielded an extra 20% in revenue.
David Horgan is director of Petrel Resources