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Global Oil Shortage Before Year’s End? Surely Not…
Global Oil Shortage Before Year’s End? Surely Not…
Now that OPEC has left its production quota unchanged, the world will continue to see a glut in supplies, right?
Some analysts aren’t so sure. Sanford C. Bernstein predicts that by the end of the year global demand will outstrip supply by an estimated 1.5 million barrels per day.
That flies in the face of a lot of separate estimates. The IEA says that oil supplies are still in excess of what the world is consuming, by some 2 million barrels per day. Even with flat supplies coming from US shale, drillers are still pumping way more oil than the world is consuming. That leaves Bernstein as an outlier when it comes to guessing which way oil markets are heading.
But there is reason to believe that Bernstein is not off the mark. While market analysts are right to closely watch the trajectory of US production levels as well as what OPEC is up to, a lot less attention is being paid to the demand side of the equation. Part of OPEC’s strategy, we must remember, is to ensure the world stays hooked on oil for the long haul. The cartel’s strategy of keeping prices low dovetails with that – low prices reduce the urgency to transition away from crude oil.
Related: Price Manipulation In The Oil Markets?
And their strategy is bearing fruit – demand is growing quickly. The IEA said in its May report that “global demand growth gained momentum in recent months.” That is certainly true in the US, where motorists are hitting the roads at levels not seen since before the financial crisis. Seduced by lower prices, gasoline consumption is at its highest level since 2007, after years of stagnation. Low gas prices are also giving a boost to SUV sales as drivers cast off their energy efficient ways at the first sign of weak prices.
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What Does Exxon Know That We Don’t?
What Does Exxon Know That We Don’t?
Forecasts from the IEA and Goldman Sachs this week are trying to say that crude barrels are still overpriced – but the market isn’t listening. I’ve been convinced that crude prices above $60 are counterproductive as Goldman said in their recent note – but other factors are continuing to help push prices higher.
Let’s take a closer look and see what’s going on – and what might go on in the near future.
Some short-term fundamentals continue to push traders into long positions in oil. I’ve been among the first to point out the large outflows of capital from just about every other asset class, save for energy stocks and commodities. This isn’t particularly smart analysis, but clearly money managers and institutional investors are looking for ‘value’ in a very hot market – and oil stocks and commodities look just too low to them. For these ‘value searchers’, it’s damn the fundamentals – full speed ahead, and oil catches a bid with every, even small bullish indication.
As appears to be the case with Chinese demand, which has incrementally picked up in recent months. But it’s not like Chinese imports aren’t being met for the most part – they are finding more oil now than ever before in their history. And imported oil is not being used. Several reports have Chinese oil stockpiles growing for the last 7 weeks – an obvious way for China to hoard oil that they think is going to get more expensive later.
US stockpiles have come slightly down in the last few EIA reports – a surprise for many who believed that storage would increase throughout the summer. Many are extrapolating that this drop in stockpiles is a harbinger of slower production from slashed numbers of rig counts, but this may be very premature.
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This May Just Be The Start Of The Oil Price War Says IEA
This May Just Be The Start Of The Oil Price War Says IEA
Saudi Oil Minister Ali al-Naimi may be one of the most powerful individuals in the global oil industry. After all, as the top oil official in arguably the world’s most influential oil-producing country, he has enormous influence.
But for all his power, is he the most ingenious? That question arises from the release of two reports on the current state of the oil industry that look at whether or not OPEC’s strategy of forcing US shale to cut back is succeeding.
The first, issued on May 12 by OPEC, says, in essence, that Saudi Arabia’s effort to keep its own oil production at near-record highs is succeeding in wresting market share back from US producers of shale oil, also called “light, tight oil” (LTO). The second, issued a day later by the International Energy Agency (IEA), agrees, but only up to a point.
Related: How Much Longer Can The Oil Age Last?
“In the supposed standoff between OPEC and U.S. light tight oil (LTO), LTO appears to have blinked,” the IEA reported. “Following months of cost cutting and a 60 percent plunge in the U.S. rig count, the relentless rise in U.S. supply seems to be finally abating.”
But the report from the Paris-based IEA, which advises 29 industrialized countries on energy policy, also pointed to a rebound in oil prices that could benefit US shale producers.
As both the OPEC and IEA reports point out, the decline in US shale oil output has somewhat reduced the oil glut and led oil prices to rally up to about $65 per barrel. And the IEA adds that this brings LTO back above the threshold where its production becomes profitable again.
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Why the World’s Appetite for Oil Will Peak Soon
Why the World’s Appetite for Oil Will Peak Soon
The conventional wisdom about steadily rising demand is wrong. Within two decades, global oil use will start to fall.
When it comes to oil demand, the conventional wisdom is clear: Population growth and a rising global middle class guarantee that demand—and prices—will rise over the coming decades. It is a story line that is almost universally accepted by investors, governments and industry alike.
But like many such consensus views, it is one that should be treated with caution.
The world’s economy is experiencing transformational changes that, I believe, will dramatically alter patterns of energy use over the next 20 years. Exponential gains in industrial productivity, software-assisted logistics, rapid urbanization, increased political turmoil in key regions of the developing world, and large bets on renewable energy are among the many factors that will combine to slow the previous breakneck growth for oil.
The result, in my opinion, is as startling as it is world-changing: Global oil demand will peak within the next two decades.
A less potent weapon
The geopolitical and economic implications of peaking demand will be huge. The fall in the importance of Saudi Arabia is already palpable, with all the major powers from the U.S. to China more willing to accommodate Saudi archrival Iran. In addition, Russia’s ability to use oil as a weapon will wane, as will the economic leverage of the Organization of the Petroleum Exporting Countries. As economic growth becomes increasingly disconnected from oil, world powers will likely shift their attention to other increasingly scarce resources that will be equally critical to economic well-being, such as food, water and minerals. A greater interest in Africa, for example, is already starting to emerge.
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Saudi Arabia’s Oil-Price War Is With Stupid Money
Saudi Arabia’s Oil-Price War Is With Stupid Money
Saudi Arabia is not trying to crush U.S. shale plays. Its oil-price war is with the investment banks and the stupid money they directed to fund the plays. It is also with the zero-interest rate economic conditions that made this possible.
Saudi Arabia intends to keep oil prices low for as long as possible. Its oil production increased to 10.3 million barrels per day in March 2015. That is 700,000 barrels per day more than in December 2014 and the highest level since the Joint Organizations Data Initiative began compiling production data in 2002 (Figure 1 below). And Saudi Arabia’s rig count has never been higher.
Figure 1. Saudi Arabian crude oil production and Brent crude oil price in 2015 U.S. dollars. Source: U.S. Bureau of Labor Statistics, EIA and Labyrinth Consulting Services, Inc.
Market share is an important part of the motive but Saudi Minister of Petroleum and Mineral Resources Ali al-Naimi recently emphasized that “The challenge is to restore the supply-demand balance and reach price stability.” Saudi Arabia’s need for market share and long-term demand is best met with a growing global economy and lower oil prices.
That means ending the over-production from tight oil and other expensive plays (oil sands and ultra-deep water) and reviving global demand by keeping oil prices low for some extended period of time. Demand has been weak since the run-up in debt and oil prices that culminated in the Financial Collapse of 2008 (Figure 2 below).
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Is Saudi Arabia Setting The World Up For Major Oil Price Spike?
Is Saudi Arabia Setting The World Up For Major Oil Price Spike?
In order to maintain a grip on market share by pushing U.S. shale producers out of the market, Saudi Arabia (and OPEC) is willing to use up its spare capacity. That could lead to a price spike.
Saudi Arabia produced 10.3 million barrels per day in the month of March, a 658,000 barrel-per-day increase over the previous month. That is the highest level of production in three decades for the leading OPEC member. On top of the Saudi increase, Iraq boosted output by 556,000 barrels per day, and Libya succeeded in bringing 183,000 barrels per day back online. OPEC is now collectively producing nearly 31.5 million barrels per day, well above the cartel’s stated quota of just 30 million barrels per day.
Related: Latest EIA Predictions Should Be Taken With More Than A Pinch Of Salt
The enormous increase in production comes into a market that is still dealing with extraordinarily low prices. The move could be interpreted as a stepped up effort on behalf of Saudi Arabia to maintain market share at all costs. More output will prolong the slump in oil prices, which will force even more U.S. shale production out of the market. The signs of success are already showing – the U.S. is set to lose 57,000 barrels per day in production in May, and rig counts are still falling.
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Latest EIA Predictions Should Be Taken With More Than A Pinch Of Salt
Latest EIA Predictions Should Be Taken With More Than A Pinch Of Salt
The U.S. government released its landmark Annual Energy Outlook on April 14, with some rather bold predictions about the future of oil and gas.
The EIA released the 2015 edition of its report at a Washington conferencehosted by the Center for Strategic and International Studies. Here are a few nuggets from the much-anticipated report:
• In its Reference Case, U.S. oil production continues to rise for the rest of the decade, keeping prices from spiking. As a result, the EIA thinks oil prices will stay below $80 per barrel through 2020.
• The U.S. becomes a net exporter of energy in 2019 as higher production combines with lower demand from improved vehicle efficiency
• Shale production peaks and begins to decline after 2020
• OPEC manages to offset falling U.S. production in the next decade with increases in output coming from several Middle Eastern countries
• The EIA is so confident about adequate supplies that it does not foresee oil prices surpassing $100 per barrel again until 2028
• Still, there is a lot of variation among the different scenarios. In its Low Oil Price case, Brent stays at $52 per barrel in 2015, but in its High Oil Price case, it surges to $122 this year
• Electricity from renewable energy increases by 72 percent between 2013 and 2040, with its share of the electricity market rising from 13 to 18 percent
Related: Off-Grid Solar Threatens Utilites In The Next Decade
These projections provide some markers for the road ahead, but the EIA is notoriously off the mark when it comes to accurately forecasting what comes next for energy markets. It routinely extrapolates current trends forwards, assuming very little will change.
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Who’s To Blame For The Oil Price Crash?
Who’s To Blame For The Oil Price Crash?
When we think of the recent drop in oil prices, the question is not only who started it, but who’s responsible for keeping the prices falling.
Probably no one would dispute that the price plunge began with the eager and copious production of oil from shale formations in the United States. From the American perspective, that was beneficial because it was bringing energy self-sufficiency to a country with the reputation as the world’s largest importer of oil.
Despite unproven concerns about hydraulic fracturing, or fracking, a common way to extract oil and gas from underground shale rock, the practice has proven extremely productive. And that’s the source of the oil glut that began driving down prices in late June 2014.
Related: Oil Rebound May Come Sooner Than Expected
Even one of fracking’s biggest supporters, legendary oil man T. Boone Pickens, blames the US shale boom for triggering the price slough that’s been hammering the energy industry. He’s doesn’t subscribe to the environmental concerns about fracking, but he says he can also recognize when his industry has latched on to too much of a good thing.
“I’ve fracked over a thousand wells,” Pickens, the chairman of BP Capital Management, said March 23 at a panel discussion in Monterey Calif. “I’ve never had a failure on one of them. … Texas, Oklahoma lead in fracking wells and it has been a great success for both those states.”
Yet Pickens thinks it’s time for US companies to take a break from their frantic production to allow oil prices to achieve some balance. In an interview with theFinancial Times published March 18, he said shale companies have “overproduced,” and that it’s up to them to rein in output to help restore oil prices to a more profitable level.
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This Is What Will Determine If Oil Prices Go Up Or Down
This Is What Will Determine If Oil Prices Go Up Or Down
It appears as if oil prices could be on the verge of a rebound, with new data showing that the U.S. oil patch is hitting an inflection point. While specific shale regions – such as North Dakota’s Bakken and Texas’ Eagle Ford – have posted production declines, overall U.S. oil output managed to edge up in recent months.
But now that U.S. production has finally dipped, it may augur a new phase for oil markets in which production cutbacks could lead to higher prices. The Energy Information Administration reported on April 1 that total U.S. oil production fell for the week ending on March 27, falling 36,000 barrels per day to 9.38 million barrels per day.
The prior week’s production level of 9.42 million barrels per day was the highest level in three decades. If output continues to decline, mid-March 2015 could mark the peak of U.S. oil output, at least for the foreseeable future.
Related: Three Triggers That Will Send Oil Crashing Again
That would raise the possibility that oil prices have bottomed out. Where do they go from here? Is it possible that oil prices could dip any lower? If they are indeed about to rise, will they rise quickly or stay flat for a while before gradually ascending?
There are several major determinants of oil prices one should consider.
1. U.S. Production. The first and most important thing to watch is the aforementioned levels of U.S. production. Weekly figures come out from the EIA and we should get a better sense of where U.S. oil flows are going next week. Consistent weekly drops will put upward pressure on prices.
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Low Oil Prices Not Enough To Kill Off Oil Sands, Yet
Low Oil Prices Not Enough To Kill Off Oil Sands, Yet
On Friday I visited the University of Alberta in Edmonton, where falling oil prices have brought a record provincial budget deficit despite aggressive tax increases and spending cuts. Here I pass along some of what I learned about how the plunge in oil prices is affecting Alberta’s oil sands operations.
A couple of factors have cushioned Canadian oil producers slightly from the collapse in oil prices in the U.S. First, while the dollar price of West Texas Intermediate has fallen 45% since June, the Canadian dollar depreciated against the U.S. dollar by 18% over the same period, and now stands at CAD $1.26 per U.S. dollar. Since the costs of the oil sands producers are denominated in Canadian dollars, the currency depreciation is an important offset. There has also been some narrowing of the spread between synthetic and other crudes. As a result of these factors, the University of Alberta’s Andrew Leach calculated that when WTI was selling for US $50 a barrel, Canadian producers were receiving CAD $60 per barrel of synthetic crude.
Related: U.S. Oil Glut Story Grossly Exaggerated
Source: Andrew Leach.
Oil sands and U.S. tight oil production have been the world’s primary marginal oil producers in recent years, by which I mean the key source to which the world could turn in order to get an additional barrel of oil produced. Ultimately, in this regime, it is the long-run marginal cost of the most costly producing operation that puts a floor under the price of oil.
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T. Boone Pickens Points The Finger At U.S Shale
T. Boone Pickens Points The Finger At U.S Shale
So what do you do when you believe devoutly in hydraulic fracking but also understand that too much fracking is responsible for an oil glut that’s hammering the price of oil like a pile-driver?
If you’re legendary Texas oil billionaire T. Boone Pickens, you call for a time out. But you don’t cloak that call trying to make excuses for the controversial oil-extraction process, which injects water and chemicals into underground rock to free fossil fuels trapped within. You simply stick to the financial facts of the case.
That’s why Pickens was speaking so positively about fracking on March 23 in Monterey, Calif., at a panel discussion hosted by the Panetta Institute, named for Leon Panetta, the former White House chief of staff, CIA director and defense secretary.
Related: No Surprises: Obama’s Fracking Rules Upset Everyone
“I’ve fracked over a thousand wells,” said Pickens, chairman of BP Capital Management. “I’ve never had a failure on one of them. … Texas, Oklahoma lead in fracking wells and it has been a great success for both those states.”
There was pushback, though, from Steven Chu, President Obama’s former energy secretary, and Carol Browner, who ran the Environmental Protection Agency (EPA) under President Bill Clinton and was Obama’s director of energy and climate change policy.
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IEA sees renewed pressure on oil prices as glut worsens
IEA sees renewed pressure on oil prices as glut worsens
(Reuters) – Oil prices might have stabilized only temporarily because the global oil glut is worsening and U.S. production shows no sign of slowing, the International Energy Agency said on Friday.
The West’s energy watchdog said the United States may soon run out of spare capacity to store crude, which would put additional downward pressure on prices.
That process would last at least until the second half of 2015, when growth in U.S. oil production is expected to start abating.
Combined with an increase in global demand, the expected U.S. production slowdown would give some support to oil prices and respite to oil producers’ group OPEC, the IEA said.
“On the face of it, the oil price appears to be stabilizing. What a precarious balance it is, however,” the Paris-based IEA said in its monthly report.
“Behind the façade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly.”
The IEA said steep drops in the U.S. rig count have been a key driver of the recent price rebound, which saw Brent crude rising to $60 per barrel after falling as low as $46 in January from last year’s peaks of $115.
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How Much Crude Oil Do You Consume On A Daily Basis?
How Much Crude Oil Do You Consume On A Daily Basis?
Oil. The commodity. We know what it’s worth – at least we thought we did – but what does a barrel of the black stuff get you in real life? Before we get theoretical, let’s first consider how much oil you use.
If you’re in the United States, that figure is approximately 2.5 gallons of crude oil per day; roughly one barrel every seventeen days; or nearly 22 barrels per year. That’s just your share of US total consumption of course; the true number is harder to discern – minus industrial and non-residential uses, daily consumption drops to about 1.5 gallons per person per day. Subtract the percentage of the population aged 14 and below and the daily consumption climbs back above 2 gallons. This is big picture, and it’s quite variable, so let’s go further.
Most of the nation’s daily crude consumption stems from transportation. If you’re an average driver in an average car, your crude consumption is in the order of 12 barrels per year. However, if your car is more than ten years old, chances are that figure is closer to 15 barrels annually. Does an electric car offer significant savings? Of course it does, but for an unconventional comparison let’s assume all of the electricity is sourced from oil – in truth, petroleum is not a very efficient fuel and accounts for just 1 percent of electricity generation in the US. Under this assumption, a Tesla Model S, with an 85 kilowatt-hour (kWh)battery and a range of 260 miles, will consume approximately 8 barrels of crude per year.
Related: The World’s 10 Biggest Energy Gluttons
Frequent flyer? Say 2,000 miles per year on a US carrier? Add about two-thirds of a barrel of crude to your annual consumption.
A 3,000-mile cruise on the MS Oasis of the Seas may sound relaxing, but at roughly 4 barrels of crude per passenger, the carbon footprint alone is worth reviewing.
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The Rig Count “Meme” (And Why The Bounce In WTI Is Likely Over)
The Rig Count “Meme” (And Why The Bounce In WTI Is Likely Over)
Recently, the Baker Hughes Rig Count has become all the rage. I did a search on Bloomberg, using only Bloomberg generated articles, with “Rig” and “Count” as matches in the headline only.
Back in October, there were barely any articles at all. The number of articles increased year end, but the articles were still concentrated on the day of the announcement. The first, and so far only, Saturday article was on January 31st. There were Sunday articles on February 18th and February 15th.
The first time I talked about Rig Count in a report was back on December 19th. By the 29th it had become part of our report and things to watch for – on the 29th I sent out the info at 1:30 pm – which, believe it or not, was the first time many saw the number that day. Contrast that to more recent reports where the headlines now come out instantaneously?
Very Little “Near Term” Info
The Rig Count data is very interesting. We used it primarily to support our Jack and Diane thesis on oil and the economy – which I think is winning more and more acceptance.
Secondarily, we thought it would support the price of oil, not because it did much for supply, but because everyone would focus on it, and too many bears had shown up. I think that is exactly what happened.
WTI Pricing
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