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Art Berman: Think Oil Is Getting Expensive? You Ain’t Seen Nothing Yet.

A global supply crunch approaches…

After issuing clear warnings on this program that sub-$50 oil prices were going to be short-lived, oil expert and geological consultant Art Berman returns to the podcast this week to explain why today’s $70 oil prices will go higher — likely much higher — and start materially contricting world economic growth.

Art explains how the current glut of oil created by the US shale boom — along with high crude output by both OPEC and non-OPEC  producers — is a temporary anomaly. Fundamentally, we are not finding nearly as much oil as we need to continue the trajectory of the global demand curve. And at the same time, we’re extracting our reserves at a faster rate than ever. That’s a mathematical recipe for a coming supply crunch — it’s not a matter of if, but when:

The price of oil has gone up 30%+ percent just here in the last year alone. There are some very good reasons for that.

In the United States, we’ve been drawing down our reserves, our inventory and the amount of oil we have in storage, consistently since February of 2017. We’re going into the 15th month of drawing from storage each week because we’re not producing enough to meet the need.

To those paying attention: the United States is right now producing more oil than it ever has in its history. We are a million barrels a day higher than the peak in 1970 — the one that King Hubbert got in trouble for warning about. We’re higher by 50,000 or so barrels per month of production. Yet, here we are, still sucking oil out of storage. What does that tell you? There is only one way to interpret that: We are using more than we are producing.

…click on the above link to read the rest of the article…

Reuters: OPEC Production Falls To 13-Month Low

Reuters: OPEC Production Falls To 13-Month Low

PDVSA crude refinery

OPEC’s oil production dropped in May by 70,000 bpd to 32.00 million bpd on the back of outages in Nigeria and a continuous decline in Venezuela that dragged the cartel’s total production to the lowest level since April 2017, according to the monthly Reuters survey.

The largest fall in production was registered in Nigeria, according to the survey based on shipping data from external sources, Thomson Reuters flows data, and information provided by sources at OPEC and oil and consulting firms.

Nigeria’s production dropped to 1.85 million bpd in May from 1.94 million bpd in April, the Reuters survey found. Nigeria has been struggling with unplanned shutdowns of pipeline flows this month, and loading of the Forcados grade is being delayed.

The second-largest fall in May came from Venezuela, whose production declined to 1.45 million bpd from 1.50 million bpd, compared to the implied target of 1.972 million bpd, which means that Venezuela’s involuntary “cut” in May was 617,000 bpd—more than the cut pledged and achieved by OPEC’s biggest producer Saudi Arabia.

Saudi Arabia, for its part, as well as the second-largest producer in the cartel, Iraq, slightly raised their production in May over April. Saudi Arabia stayed within its quota and its production inched up to 10.00 million bpd because more crude oil was consumed domestically by power plants, according to sources in the Reuters survey.

Iraq produced more because it increased exports from its southern ports, following a drop last month.

According to the latest available figures by OPEC’s secondary sources—the ones that OPEC uses to measure quotas and compliance with the deal, OPEC’s production in April increased by 12,000 bpd over March, to average 31.93 million bpd, as Saudi Arabia boosted its production by 46,500 bpd.

…click on the above link to read the rest of the article…

The Double-Edged Sword Of High Oil Prices

The Double-Edged Sword Of High Oil Prices

barrel

Rising oil prices were seen last year as a positive result of growing global growth and recovery, but a combination of factors is turning this benign view into a more sinister scenario.

On the supply side, the combined efforts of OPEC and Russia, leaky as the agreement has been, have managed to reduce the global oil surplus in just 18 months to bring the market largely into balance. As a result, oil prices have gradually risen during the period. It’s a trend most observers have been sanguine about, believing the U.S.’s tight oil producers, encouraged by rising prices, will increase output to ensure ample supply and keep a lid on oil prices getting ahead of themselves.

(Click to enlarge)

But that benign view had not taken account of President Trump’s decision to rip up the Iran nuclear deal and, as a result, to reinstate sanctions, a move that will take place in two phases to give firms time to adjust.

According to The Telegraph, this will be done in two stages, on Aug. 6 and Nov. 4, allowing 90- and 180-day wind-down periods. In addition, the Treasury is to re-list Iranian individuals and entities in the Specially Designated Nationals (SDN) list, thus revoking special licenses and exceptions previously granted to individuals and companies to deal with Iran, making it all but impossible for firms with a U.S. presence or needing dollar clearing to deal with them.

Lastly, Iran’s crude oil sales will be limited under the National Defense Authorization Act of 2012, as the U.S. departments of State, Energy and Treasury will allow ongoing but reduced purchases of oil from Iran, termed “significant reduction exceptions” on a country-by-country basis if they demonstrate a commitment to substantially decrease oil purchases (usually at least a 20 percent reduction).

…click on the above link to read the rest of the article…

IEA Cuts 2018 Oil Demand Forecast On Soaring Oil Prices

Yesterday, we observed that in logical consequence to sharply higher interest rates, US consumer loan demand had slumped in recent weeks, despite increasingly easy credit conditions: an outcome which for many economists is a harbinger to an upcoming recession, as households hunker down and begin to deleverage.

Now, following a similar causal chain, this morning the International Energy Agency also cut forecasts for global oil demand growth in 2018 due to oil’s recent price surge, as the highest prices in three years put a brake on consumption. As a result, the agency trimmed its 2018 world demand growth projection by 40,000 barrels a day to 1.4 million a day, projecting total consumption at 99.2 million barrels a day, down from 99.3mmb/d, still higher than the 97.8mmbpd global oil demand in 2017.

“The recent jump in oil prices will take its toll,” said the Paris-based agency, which serves as an advisor to most major economies on energy policy. Crude has jumped 17% this year, trading near $78 a barrel in London on Wednesday, and approaching the stated Saudi target of $80/barrel at which point the Aramco IPO once again becomes feasible.

As one would expect, the demand forecast by the IEA – which is not a cartel of oil producers and is therefore less biased – differs greatly from the forecast by OPEC – which is a cartel of oil producers and therefore is programmed to see only the best possible outcome no matter how high the price. As shown in the chart below, whereas the IEA demand forecast topped out, that of OPEC sees nothing but blue skies ahead.

The IEA commented on the 16-month campaign by OPEC and its allies to slash a global oil glut, which the agency said had been finally successful, with inventories falling below their five-year average for the first time since 2014. Markets are set to tighten further as output sinks in the economic disaster that is Venezuela and the U.S. re-imposes sanctions on Iran.

…click on the above link to read the rest of the article…

OPEC: The Oil Glut Is Gone

OPEC: The Oil Glut Is Gone

Oil storage

OPEC said that the global oil supply surplus has nearly been eliminated, although the group is shifting its sights on lack of investment in upstream supply.

In OPEC’s May Oil Market Report, the group noted that non-OPEC supply continues to grow at a rapid rate, adding 0.87 million barrels per day (mb/d) in 2017, with expectations of another 1.7 mb/d in 2018, 89 percent of which will come from the U.S. In fact, non-OPEC supply is expected to outpace demand growth, even though demand will expand by a robust 1.65 mb/d this year.

But OPEC also warned that “non-OPEC capital expenditure (CAPEX), including exploration, increased by only 2% y-o-y. Moreover, it has seen a decline of around 42% compared to the 2014 level.” While that seems like a bit of a throw-away line given the enormous production increases from U.S. shale, the focus on upstream investment has been a growing point of emphasis for OPEC as it grapples with how to respond to a tightening oil market.

(Click to enlarge)

Commercial stocks were only 9 million barrels above the five-year average in March, which is to say, stocks are probably already below the five-year average at this point. That means that OPEC has achieved its goal of shrinking the supply surplus.

That would suggest that the group begins to unwind the production cuts at its upcoming meeting in June, but there has been a reluctance to do so. Saudi Arabia is aiming for higher oil prices ahead of the IPO of Saudi Aramco, expected at some point in 2019. Related: Iran Sanctions Threaten The Petrodollar

Keeping the cuts in place for the remainder of 2018 (OPEC’s initial preference) would seem to require another justification now that inventories are back to the five-year average. Raising alarms about lack of upstream investment could offer such a pretext.

…click on the above link to read the rest of the article…

OPEC April Production Data

OPEC April Production Data

The OPEC charts below were created with data from the OPEC Monthly Oil Market Report. The PDF File can be downloaded from here: OPEC MOMR All OPEC data is through April 2018 and is in thousand barrels per day.

There was little change in OPEC production in April.

OPEC production was  up 12,000 barrels per day in April but that was after February production had been revised down by 74,000 bpd and March production revised down by 39,000 bpd.

I am going to forgo commenting on each country unless there is something dramatic happening.

…click on the above link to read the rest of the article…

Never Trust A Banker About Oil Prices

Never Trust A Banker About Oil Prices

Shale

In recent weeks I’ve commented on the powerful bullish forces that have combined in oil and oil stocks and your need to increase your exposure to them. So, before going on to other topics, this has to be the start of any column until further notice, despite the weakness in stock indexes overall.

OPEC and particularly Saudi Arabia continue to drop not so quiet hints about the importance of higher oil prices – for the cartel and the upcoming IPO of Saudi Aramco. In case anyone might have forgotten about their one-shot chance to remake their entire economy and culture, another ‘leak’ of Saudi oil reserve numbers was served up in the past week – a positive one, of course.

Many of the analysts who previously were pessimistic about the rise in oil prices have been slowly and steadily raising their projections. That should neither encourage us or bother us, as bank analysts have a dismal record of correctly projecting prices much into the future. One should always trust a trader first; whose obligation is to his own investments and money and not to retaining the respect of the community or keeping the job. Always remember: An analyst’s first priority is not to be wrong, while a trader doesn’t care if he’s wrong or right, only if he’s got the right side of the trade and making money.

Similarly, the speculative trade from hedge funds continues to be almost uniformly long – a fact that used to bother me much more in the days when bank proprietary trade desks dominated the speculators. In those days, their own positions would often be in conflict with sales, and, Chinese wall or not – could make for some very sticky and fast reversals of positioning inside the banks.

…click on the above link to read the rest of the article…

Will Higher Oil Prices Destroy Demand?

Will Higher Oil Prices Destroy Demand?

Oil

Oil prices have dipped a bit this week, but still remain at their highest levels in nearly three and a half years. The reasons are by now familiar to most readers who pay attention to the daily whims of the oil market: OPEC cuts, falling inventories, geopolitical unrest and strong demand growth, to name a few.

But at what point do higher prices start to destroy some of that demand, erasing one of the most significant bullish factors influencing the market right now? As John Kemp over at Reuters points out, there isn’t a magical threshold in which demand is humming along swimmingly and then suddenly drops off a cliff. There isn’t a binary response in that way.

Consumers respond in different ways to different prices, and the duration of high prices also matters quite a bit. Auto fleet turnover takes time, and people don’t rush out and buy a more fuel efficient car immediately when prices spike. And as John Kemp rightly argues, demand will likely take a hit before we can detect it in the data.

Nevertheless, demand is sensitive to prices, which is to say it will slow or even decline if prices rise high enough. A brief look at recent history bears that out. Crude oil prices saw a historic run up in prices in the years preceding the 2008 record high spike and subsequent meltdown. That rally essentially ended a century-long upward trend in demand, which hit a high above 21 million barrels per day (mb/d) in the U.S. in 2006-2007. The financial crisis, a terrible economy, more efficient cars and a somewhat saturated auto market led to a temporary peak in oil demand, which was followed by several years at lower levels.

(Click to enlarge)

When oil prices rose back to $100 per barrel in 2011 following the Arab Spring, demand dipped even further.

…click on the above link to read the rest of the article…

Expect Much Tighter Oil Markets

Expect Much Tighter Oil Markets

offshore rigs

As oil prices hover close to multi-year highs, Saudi’s Oil Minister has hit the wires saying that OPEC ‘shouldn’t be complacent and listen to some of the noise such as mission accomplished‘ . Just as we learned earlier in this economic cycle via ‘don’t fight the Fed’, we too should take heed: ‘Don’t fight the Falih’.

Year-to-date, U.S. crude inventories have risen by 3 million barrels, compared to 53 million barrels for the same period last year. Our seasonal Q1 build has been distinctly errant.

While a number of factors can be assigned for such a lack of upward trajectory (higher exports, stronger refinery runs, lower waterborne imports), the slashing of crude flows to the U.S. from Saudi Arabia has also played a part. Saudi crude deliveries were down over 50 million barrels year-on-year in Q1, a third consecutive quarter of considerably lower year-on-year imports.

The aforementioned combo of higher exports, stronger refinery runs and lower waterborne imports have colluded to leave Q1 U.S. crude inventories 110 million barrels lower than end-March last year. (Granted, this is from a high-water mark indeed – the absolute record of U.S. crude inventories at 535.54 million barrels, but hey).

(Click to enlarge)

In 2017, Saudi crude deliveries to the U.S. dropped by 160,000 bpd versus the prior year. Meanwhile, total OPEC deliveries to U.S. shores in both 2016 and 2017 averaged ~3.2 million barrels per day, with imports last year really strong in the first half of the year, before taking a dive in the second half (hark, below).

In Q1 of this year, OPEC deliveries averaged close to 2.7 million bpd, down nearly 20 percent on year-ago levels and the lowest quarter since Q3 2015. This is both a combination of OPEC reining in supplies, and a lesser need from U.S. refiners for OPEC barrels, as they lean as heavy as they can on soaking up rising domestic production.

…click on the above link to read the rest of the article…

Goldman: Oil Demand Will Continue To Soar

Goldman: Oil Demand Will Continue To Soar

GS

Oil demand is growing, and production is falling. This is the message we have been receiving for a few weeks now with increasingly frequency, especially after OPEC’s leader Saudi Arabia admitted it would like oil prices even higher than US$70. Like a genie from a lamp, the market immediately obliged with traders rushing in to buy more oil, pushing Brent closer to US$75.

Everyone who’s anyone seems to be upbeat about demand. The IEA forecasts daily demand growth at 1.5 million bpd this year. Reuters shipping data suggests April imports into Asia will hit an all-time high. Investment banks are bullish. What could go wrong?

If you listen to Goldman’s Jeffrey Curry, nothing. In a recent interview with Bloomberg, Currie said, “You’d have to get a really high price before you start to see it damage demand, adding that higher oil prices were actually good for the global economy because higher oil prices lead to creation of global excess savings – petrodollars,” which are then invested again globally, stimulating further demand.

In case anyone suspects there is something wrong with this rosy picture, they are right. For starters, these “global excess savings” will only come after oil producers close their budget gaps. Saudi Arabia alone has budgeted a deficit of more than US$50 billion for this year. It will be a while before it gets to have any savings, let alone excessive ones, to invest globally and stimulate oil demand. This is true of other major producers, too, as they all were hit hard by the last oil price crisis.

Leaving budget deficits aside, there is also the problem with inflation. Since virtually every single economy in the world is dependent on oil, inflation is closely linked to prices. Higher oil prices mean higher fuel prices and higher fuel prices drive higher inflation.

…click on the above link to read the rest of the article…

What Is A ‘Fair’ Price For Oil?

What Is A ‘Fair’ Price For Oil?

Oil Pump

Last week, oil prices hit their highest level since late 2014 on the back of continued global and U.S. stockpile drawdowns and expectations that oil demand growth will stay strong this year.

Analysts and officials are once again trying to predict what a ‘fair’ price for oil is – a prediction that must take into account the summer driving season, the possibility of new sanctions on Iran, elections in Venezuela and Iraq, continuous OPEC chatter about “mission accomplished or not”, and reports of OPEC kingpin Saudi Arabia aiming for oil prices of $80 to $100 a barrel.

Some analysts and officials believe that oil prices could hit $80 this year, although such a price would probably be due to the geopolitical risk premium rather than market fundamentals.

Even if oil prices were to rise to $80, such an increase would be short-lived, and would be mostly fueled by fears of a supply disruption, especially in the Middle East with possible new sanctions on Iranian oil and with tenser situations in and around Syria and Yemen. Then there’s Venezuela, with its oil production plummeting and elections expected to be held in May—and if the U.S. were to slap further sanctions on Venezuela, such as on its oil industry, it would be yet another wild card for oil prices later this year.

Yet, around $75 oil is as good as it’s going to get in the short term, according to some investment banks and oil officials. No one is predicting oil at $100 yet.

“I think $65 to $75 is more realistic numbers for the rest of the year, but there are so many factors that can change that,” Mohammed bin Hamad Al Rumhi, the oil minister of non-OPEC participant in the production cut deal, Oman, told CNBC.

“In my opinion, where we are is not too bad and we can live with it. That’s $65 to $75, give or take, for the foreseeable future,” said the minister.

…click on the above link to read the rest of the article…

Saudi Arabia’s $100 Oil Dilemma

Saudi Arabia’s $100 Oil Dilemma

Saudi

Saudi Arabia is rumored to want oil prices at $100 per barrel, but if prices rise that high, it could sow the seeds of the next downturn.

Saudi officials want more revenues for their budget and a higher oil price to bolster the valuation of the Aramco IPO. But that short-term thinking could spell trouble not just for them, but also for oil prices, and ultimately for longevity of oil demand.

As Liam Denning of Bloomberg Gadfly points out, in the past decade, while oil prices have surpassed $100 per barrel for periods of time, they didn’t stay there for very long. In 2008, when oil nearly hit $150 per barrel, it was quickly followed by the financial crisis and a deep U.S. recession. Then, the period between 2011 and 2014, when oil was north of $100 per barrel, U.S. shale crashed the market with a wave of fresh supply.

If Saudi Arabia aims to drive up prices to triple-digit territory once again – and to be sure, that is only a rumor at this point – there are plenty of ways that could merely create the conditions for another bust.

First, oil prices are rising, in part, because demand is so strong, not just because OPEC is keeping barrels off the market. Oil at $100 would essentially amount to a doubling of the price from the past few years, which would quickly put an end to high demand growth rates.

A corollary to this is that $100 oil would likely impact economic growth. The economic recovery from the financial crisis in 2008 is almost a decade old at this point, much longer than the average upswing. History suggests that we are due for a recession at some point in the not-so-distant future. A spike in fuel prices around the world could help bring that on.

…click on the above link to read the rest of the article…

OPEC March Crude Oil Production Data

OPEC March Crude Oil Production Data

All OPEC data below was taken from the April issue of The OPEC Monthly Oil Market Report. The data is through March 2018 and is thousands of barrels per day.

OPEC crude oil production dropped just over 200,000 barrels per day in March. They are now just over one million barrels per day below their fourth-quarter 2016 average.

Only the UAE showed any significant gain among OPEC members.

Algeria took a hit in March, down almost 50,000 barrels per day. They reached a new low of under 1,000,000 barrels per day.

Angola took the biggest his of all OPEC nations in March. They dropped 82,000 barrels per day to reach their lowest level in almost 7 years.

Ecuador has slowed their decline during the last two months.

…click on the above link to read the rest of the article…

IEA: U.S.-China Trade Row Could Dampen Oil Demand Growth

IEA: U.S.-China Trade Row Could Dampen Oil Demand Growth

Shale oil

OPEC is very close to achieving its mission to draw oil inventories down to their five-year average, but the ongoing U.S.-China trade spat is a risk to oil demand growth expectations this year, the International Energy Agency (IEA) said in its Oil Market Report on Friday.

The Paris-based agency kept its global oil demand growth estimate unchanged from last month’s report—at 1.5 million bpd for this year.

“However, there is an element of risk to this outlook from the current tension on trade tariffs between China and the US,” the IEA noted.

The trade dispute is “introducing a downward risk to the forecast,” said the agency which sees oil demand growth possibly dropping by around 690,000 bpd if global economic growth were reduced by 1 percent on the back of widespread increase in trade tariffs.

“Oil demand would suffer the direct impact of lower bunker consumption and lower inland transportation of traded goods, reducing fuel oil and diesel use,” said the IEA.

On the supply side, the agency continues to expect non-OPEC growth unchanged at 1.8 million bpd, with the U.S. production growth also unchanged from the previous report, at 1.3 million bpd year on year. Yet, there is concern about takeaway bottlenecks in Midland, Texas and in Canada, and those could widen the discounts of local grades to the international benchmarks, according to the IEA.

OECD commercial stocks—OPEC’s current measure of the success of its production cut deal—dropped by 26 million barrels in February and were just 30 million barrels above the five-year average at end-February.

“The average could be reached by May, on the assumption of tight balances in 2Q18. Product stocks are already in deficit,” the IEA said.

…click on the above link to read the rest of the article…

Saudi Officials Worried About Oil’s Future

Saudi Officials Worried About Oil’s Future

Saudi delegation

Saudi government officials like talking to the media about oil. They invariably come across as upbeat, confident that the OPEC deal will achieve its goal of shrinking the global oversupply, and equally confident that U.S. shale will not seriously eat away at their oil revenues, however fast it grows.

The general message seems to be: We can handle everything. Behind the scenes, however, things look differently, Time reports, citing former and current U.S. government officials with experience in the Kingdom.

Following an interview with Crown Prince Mohammed, in which he anticipated a bright future for crude oil thanks to new strong demand, Time talked to several U.S. officials who shared their concern about how realistic this view of the industry actually is.

In fact, these officials believe Saudi Arabia is still overdependent on crude oil, and this could spell trouble for the barely contained powder keg that is the Middle East—a ripple in crude oil would likely set the region all ablaze. What’s more, they say, Saudi Arabia is still unable to make ends meet, even at the current higher oil prices. If prices fall and its deficit deepens further, the Kingdom would be hard pressed for an urgent change in its heavily subsidized economic model. There is even a danger of the economy crashing, one U.S. official said, and should this happen, chaos will ensue.

It is possible that Saudi officials are downplaying some very real threats to all the ambitious economic reform plans initiated by Mohammed bin Salman. However, it seems difficult to gauge the importance of these threats when Saudi sources are often at opposing ends of the opinion spectrum. Some, U.S. officials say, are adamant that everything around the reforms is proceeding smoothly. Others are equally adamant that the Kingdom is running on fumes that will soon evaporate.

…click on the above link to read the rest of the article…

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