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Oil inventories are approaching the five-year average level in OECD countries, the all-important threshold for “re-balancing” the oil market.

A year and a half on from OPEC’s original deal to limit output, the surplus oil stashed in storage tanks around the world are nearly back to average levels. However, by all indications, OPEC is not ready to ease up on the production caps, with top officials signaling a desire to keep the cuts in place into 2019.

But that might require changing of the definition of a “balanced” oil market. OPEC has consistently held up OECD inventories as the metric upon which it was basing its calculations. The goal was to drain inventories back down to the five-year average. With OECD inventories about 44 million barrels above that threshold in February – down from a roughly 300-million-barrel surplus at the start of 2017 – the goal will likely be achieved at some point this year, perhaps in the second or third quarter.

For a variety of reasons, reaching this milestone is not satisfactory for OPEC. For one, the measurement is clouded by the fact that it’s a running calculation, meaning that the past five-years is now made up of more than three years of bloated inventories. In other words, the current five-year average is significantly higher than the five-year average in early 2014 when inventories were not suffering from a supply glut.

The flip side of that argument is that the oil market is way bigger than it was in 2014. Both supply and demand are higher, meaning that the global market probably needs a much higher level of oil sitting in storage. As such, it isn’t necessarily a bad thing that inventories are above the five-year average.

Another reason why OPEC is suddenly not satisfied with OECD inventories as the sole metric around which it bases its decisions is that OECD inventories do not capture the entire global oil market. What is happening in the non-OECD, where at this point, much of global demand growth is occurring? A more comprehensive measurement that included non-OECD inventory data would paint a more accurate picture of the global oil market. However, the problem with this is that non-OECD data is notoriously opaque, which is exactly why OECD inventories is a widely-cited data point.

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

Trump’s Trade Wars Could Spark A Massive Drop In Oil

March 5, 2018

Trump’s Trade Wars Could Spark A Massive Drop In Oil

Today, I am breaking with two of my rules in writing these pieces. I generally try to steer clear of politics and to avoid being alarmist or overly sensational. What has forced me to ignore both rules is the announcement on Thursday by Donald Trump that he is going to enact tariffs on steel and aluminum next week. Politicians in general have less influence on economies than they think, but they can cause disruption, and particularly when they make economic decisions for political reasons. That is what this is, and it has the potential to cause a massive selloff of oil and other commodities.

You may feel that this is ultimately good policy and given the circumstance, a strong argument can be made that is true. Here though, the timing of the announcement suggests that it is in response to what looks like increasing chaos in the administration and a Special Counsel’s investigation that seems to be moving inexorably closer to the President himself. In other words, it is a political play, regardless of the potential short-term economic consequences. The actual results of imposing tariffs and sparking retaliation, however, are not the point. What matters, as is so often the case, is perception, and the perception of traders will be that measures such as those proposed could pose a serious threat to global growth and thus cripple demand for oil.

(Click to enlarge)

There has been a lot of focus during oil’s recovery back into the 60s on supply, with the output cuts from the OPEC led group of producers leading to a reduction in the worldwide glut of crude. But, those cuts are only effective if demand continues to grow.

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

Oil Market Fears: War, Default And Nuclear Weapons

March 1, 2018

Oil Market Fears: War, Default And Nuclear Weapons

The U.S. is one of the few areas of the world in which there is an energy investment boom underway, a development that could smooth out the uncertainties of geopolitical events around the world. At the same time, outside of the U.S., there is a deterioration of stability in many oil-producing regions, aggravating risks for both oil companies and the oil market, according to a new report.

Financial risk firm Verisk Maplecroft explores these two trends as they play out simultaneously. The U.S. shale sector has emerged from years of low oil prices, damaged but still intact. Importantly, the shale industry “can ride out price dips and respond quickly to upticks, weakening OPEC in the process,” James Lockhart-Smith, director of financial sector risk at Verisk Maplecroft, wrote in the report. Combined with deregulation at the federal level, the oil industry is in the midst of an investment boom in the U.S.

Meanwhile, things are not so rosy elsewhere. Verisk Maplecroft surveyed a long list of countries, and produced its Government Stability Index (GSI), which uses some predictive data and analysts forecasts to take stock of geopolitical risk in various countries over the next few years.

The results are not encouraging. The number of countries expected to see a deterioration of stability “significantly outnumber those we see becoming more stable,” the firm said. The reasons are multiple, including low oil prices, but also the erosion of democratic institutions. Related: Something Unexpected Just Happened In LNG Markets

“We don’t see increasing instability necessarily ending in coups or significant political upheaval, but a less predictable above-ground-risk environment is likely to emerge,” Verisk Maplecroft’s Lockhart-Smith said. “Arbitrary decision making, possible measures to buy off key stakeholders or an inability to pass regulatory reforms will be the main risks to projects in these countries, as their governments seek to stabilise and maintain their influence.”

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

Five oil market myths that need dispelling: Fuel for Thought

January 9, 2018

Five oil market myths that need dispelling: Fuel for Thought

The oil market has come to be defined by several narratives over the past couple of years: market rebalancing, OPEC versus shale, Russia’s delicate relationship with OPEC, OPEC’s conformity with production cuts with the latest deal extension running to end of 2018 and shale’s resilience to lower prices. But these frameworks have created a narrow ideology that could harm the way producers participate in the oil market this year and beyond.

Myth 1: OPEC’s exit strategy means exit

The idea that the 24 producers who came together and struck a deal to cut production by 1.8 million b/d in November 2016 are somehow going to ‘exit’ the alliance later this year is misleading. There will be no exit when OPEC, Russia and other non-OPEC producers decide the market has rebalanced—based on OECD stock levels reaching their five year average — rather a continuation of the grand alliance under amended, and most probably looser, terms.

OPEC’s hands are somewhat tied: unwind from the deal and undo all the good work achieved and so must continue managing the market in another guise to create stability and encourage long-term investment in oil.

Gary Ross at Platts Analytics has been talking of cuts “into perpetuity” since the historic deal was made and informed industry sources note that the exit strategy is the wrong phrase to be using. But while there is uncertainty as to what that new agreement will look like, the market will anxiously hang on to the exit strategy term and these jitters could serve to keep an ultimate cap on prices.

Myth 2: OPEC’s top priority is market rebalancing

Market rebalancing may be the measure, backwardation may be the means but price is the ultimate goal.

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

Oil Market On Edge Following Outages

December 20, 2017

Oil Market On Edge Following Outages

Several key outages have left the oil markets anxious despite a promising start to the week. Analysts are keeping a close eye on both Nigeria and Venezuela as political instability threatens to impact supply further.

(Click to enlarge)

– Brazil’s oil production surged this year, jumping to 3.3 million barrels per day (mb/d), up from 3.2 mb/d in 2016 – a figure that includes other liquids production.

– The increase came largely from the pre-salt, which surpassed 1 mb/d in 2017, a sharp 33 percent increase from 2015 levels.

– Brazil is now the 9th largest oil producer in the world.

Market Movers

• Eni (NYSE: E) started production at its Zohr gas field in Egypt. Separately, the Italian oil company said that it restarted production at its Goliat field in Norway’s Arctic after a two-month outage.

• Ecopetrol (NYSE: EC) announced its fourth oil discovery in Colombia this year. “This new discovery shows that we are on the right track to our objective of increasing reserves. We are satisfied with the results of this alliance with Parex, which has underlined the potential of Santander province,” Ecopetrol CEO Felipe Bayon said.

• Total SA (NYSE: TOT) announced a final investment decision for large-scale development of the Libra project in offshore Brazil. The project will consist of a floating production storage and offloading unit with eventual capacity of 150,000 bpd.

Tuesday December 19, 2017

Oil prices initially rose on Monday on news that Nigerian oil workers went on strike, raising fears of a supply outage. The strike was called off, however, leading to a selloff in oil prices. But the lingering outage of the Forties pipeline continues to support Brent prices.

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

Half A Million Bpd At Risk From Geopolitical Firestorm

October 18, 2017

Half A Million Bpd At Risk From Geopolitical Firestorm

It’s been a long time since geopolitical developments caused major movements in the oil price, but the escalating tension between the U.S. and Iran, combined with the sudden military clashes in Iraq, has pushed geopolitical risk back on to the agenda for the oil market.

“Geopolitical risks to the oil market have continued to intensify,” Goldman Sachs wrote in an October 17 research note. In addition to Iraq and Iran, the decline in Venezuela’s oil production “appears to be accelerating,” while the resurgence in output from Libya and Nigeria continues to be fragile. “There remains high uncertainty on the potential impact of these new tensions on the oil market.”

But it’s Iraq and Iran that have really raised fears of outages. As of October 17, preliminary reports suggest that about 350,000 bpd of oil production from the Kirkuk oil fields were disrupted, with conflicting reports about whether or not that output has come back online. Iraqi officials said that the interruptions would be temporary and short-lived, and the Kurdish government insisted that it wouldn’t block exports through its pipeline system.

It’s in the interest of both sides to keep the oil flowing, but there’s still a risk of miscalculation and escalating conflict. The problem for Baghdad is that the oil must continue to flow through Kurdish pipelines, as the Iraqi government’s preferred pipeline system is damaged and needs repair. That means that both sides need to agree to some sort of revenue sharing arrangement, but that’s been an intractable issue in the past.

Unlike Iraq, Iran presents very little near-term risk. Instead, it will take time to see the response from Washington. If the U.S. reimposes sanctions, “several hundred thousand barrels of Iranian exports would be immediately at risk.”

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

Just How Big Is The Oil Market?

September 18, 2017

Just How Big Is The Oil Market?

Big Oil

The Oil Market Is Bigger Than All Metal Markets Combined

Ever since the invention of the internal combustion engine, oil has been one of the most crucial commodities on Earth. Without it, modern transportation as we know it would not be possible. Industries such as aviation, aerospace, automobiles, shipping, and the military would look nothing like they do today.

Of course, as we now know, this has all come with some extreme drawbacks from an environmental perspective. And while new green technology and the lithium revolution will aid in eventually reducing the role of oil in transportation, the fact is we still use 94 million barrels per day of crude worldwide.

As a result, the energy industry continues to have huge amounts of influence on our lives. Special interest groups with a focus on energy have influence on a domestic level. Meanwhile, from a foreign policy angle, countries like Saudi Arabia and Russia wield additional geopolitical and economic power because of their natural resources. It’s even arguable that everything from the Gulf War to the more recent Middle East interventions in Libya, Syria, and Iraq have been at least partially to do with oil.

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

Demand destruction and peak oil

June 5, 2016

Demand destruction and peak oil

Roger Baker is a transportation and energy reform advocate based in Austin, Texas. Long time member of ASPO, we actually met at one of the first ASPO conferences, the one held in Pisa, in 2006. Here he discusses the current situation with crude oil and the global economy.

We are fully under the influence of petroleum demand destruction. The global oil market can’t function without real oil production price discovery, which doesn’t exist in the currently deflationary global economy, which forces indebted producers to sell far below cost.

Both supply and demand seem to cyclic in nature and we are not finished with the supply destruction phase, which can only be revived through a globally realistic oil trading price, which nobody knows. This is an unknown until demand destruction also runs its course. The global demand in the oil supply-demand balance that sets the global oil price cannot be known until we can understand where the global economy is headed. The global material economy seems to be contracting as the Baltic dry index, trucking, and railroad profitability seem to affirm, even ignoring oil prices and Chinese economy.

The reality is probably that a falling EROEI and the end to cheap oil after ~2005 made our finance capital investment growth less profitable. But this fundamental shift has been hidden through easy central bank credit and fiat currency generated on demand to pay interest on a growing mountain of unpayable debt, with a shift of debt from private hands to public, such as away from Wall Street toward Fed and US Treasury obligations. Now we see the world’s major central banks each independently creating their own fiat currencies to preserve a trading advantage, led by the dollar as the world’s standard reserve currency.

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

Oil Market Hype And Crisis Signal Greater Troubles Ahead

April 20, 2016

Oil Market Hype And Crisis Signal Greater Troubles Ahead

Wednesday, 20 April 2016 02:11 Brandon Smith

Most people are not avid followers of economic news, and I don’t blame them. Financial analysis is for the most part boring and tedious and you would have to be some kind of crazy to commit a large slice of your life to it.

However, those of us who are that crazy do what we do (and do it independently) because underneath all the data and the charts and the overnight news feeds we see keys to future events. And if we are observant enough, we might even be able to warn people who don’t have the same proclivities but still deserve to know the reality of the world around them.

Most Americans and much of the rest of the planet probably was not aware of the recent oil producer’s meeting in Doha, Qatar this past Sunday, nor would they have cared. A bunch of rich guys in white dresses talking about oil production levels does not exactly spark the imagination. What the masses missed, though, was an event that could affect them deeply and economically for many months to come.

A little background highly summarized…

After the derivatives and credit crisis launched in 2007/2008 the Federal Reserve responded to disastrous levels of deflation with a fiat money printing bonanza. Everyone knows this. The problem was the central bankers never had any intention of actually using all that “cash” to support Main Street or the fundamentals of the economy.

Instead, they used their printing press and digital loan transfers to artificially re-inflate the coffers of banks and major corporations. It was a blood transfusion for vampires, if you will.

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

Oil Prices Fall Fast On Huge Inventory Build

March 23, 2016

Oil Prices Fall Fast On Huge Inventory Build

Two hundred and twenty-two years after Josiah G. Pierson patented the rivet machine, and the oil market remains as riveting as ever. (I’m here all week, folks). After yesterday’s API report gave a flourishing hat-tip towards a large build to crude stocks and a large draw to gasoline, oil is sliding amid a stronger dollar, while gasoline is pushing higher. Here are some things to consider today:

Jumping straight into economic data, the most insights we’ve had overnight have come from Brazil. Its mid-month inflation print dropped into single digits (at +9.95 percent), but still close to a 12-year high. Meanwhile, its unemployment rate jumped to 8.2 percent, its highest level in nearly 7 years.

Economic weakness in Brazil is strongly tied to the performance of the underlying resources it is rich in. Hence, as the price of key commodities for the South American country – such as soybeans, iron ore and crude – have headed south, so has its economy. As the chart below illustrates, the fate of the state-run oil company Petrobras tracks closely with oil prices. Hence as oil prices have charged lower, it is no surprise to hear this week that Petrobras has reported its biggest ever quarterly loss of $10 billion in Q4 of 2015, due to asset write-downs amid falling oil prices.

(Click to enlarge)

We have U.S. weekly inventories on deck this morning, with last night’s humongous API crude build of 8.8 million barrels adjusting expectations ahead of today’s number. The API report also yielded a large 4.3 million barrel draw to gasoline stocks, pointing to a drop in refinery utilization (read: refinery maintenance) amid destocking from the winter to the summer blend. As we mentioned yesterday, our ClipperData showed strong crude imports last week amid a wealth of waterborne arrivals into the U.S. Gulf, tipping us off to a crude build.

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

Why Saudi Arabia Has No Intention To End The Oil Glut

March 10, 2016

Why Saudi Arabia Has No Intention To End The Oil Glut

In the geopolitical and oligopolistic global oil market, purely financial supply and demand has often been a secondary force, acting when it is allowed to act. It is the strategic behavior of the producing titans, not their talk or the slow-motion supply-demand balance, which has the real power to move markets. That is the case in the last two years and remains the case in 2016.

The behavior of Saudi Arabia since 2014 has demonstrated the intent to increase both capacity and supply, a pattern not yet mitigated despite a distracting news feed from OPEC and the kingdom.

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Figure 1: Rig counts in US (oil-directed) and Saudi Arabia.

Figure 1 shows the rig counts in Saudi Arabia and the United States from 2009 to last week. (footnote: The U.S. count is oil-directed rigs while it is the total rig count in Saudi Arabia which produces mainly associated gas and exports none.) The data is shown on two different scales in such a way that the curves are equivalent during 2012 and 2013 as this was a relatively stable baseline with Saudi running 80 to 85 rigs, and 1300 to 1400 were drilling for oil in the US. What is most interesting are the actions since then.

As the shale oil revolution had sustained momentum at prices near $100 /bbl, Saudi Arabia began the second most rapid rig count expansion in its history starting in late 2013. During 2014, while the potential for oversupply was clearly known and even as prices turned sharply down in the latter half of the year, Saudi continued ramping up its rig count.

In late November 2014, the semi-annual OPEC meeting turned dissentious, and the group closed without even the pretense of a target production volume. Starting in November and continuing through March, the Saudi rig count grew in its third largest expansion in history, increasing 15 percent in four months.

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

Petro Currencies Under Fire As Oil Keeps Sliding

January 7, 2016

Petro Currencies Under Fire As Oil Keeps Sliding

Low oil prices put pressure on the budgets of major oil producing countries in 2015, but the next domino to fall could be their currencies.

Petro-economies with flexible exchange rates have already seen double-digit declines in the value of their currencies over the past year, in percentage terms. But with crude now at 11-year lows, pressure is also mounting on a range of currency pegs. The futures contract for the value of the Saudi riyal, which has been pegged to the dollar for three decades, hit a 16-year low. While Saudi Arabia has no plans to ditch its currency peg, at least officially, the markets are starting to bet that the country won’t be able to maintain the peg due to budgetary pressures and dwindling foreign exchange reserves.

Low oil prices have blown a massive hole in the Saudi budget. For now, Saudi Arabia has chosen a path of austerity in order to try to address the problem. It revealed a budget that calls for reforming fuel subsidies, raising taxes, and lower spending. But for a government that is keen to maintain social stability, slashing public expenditures is not really something it can lean on too much.

With its oil market strategy a priority at the moment, ruling out an effort to significantly increase oil prices through production cuts, the only other option to fix its budget deficit is to abandon its currency peg. The Saudi riyal has been pegged at 3.75 to 1 U.S. dollar, but the futures market sees one-year contracts at 3.82, a 16-year high. Commerzbank AG says the peg is no longer sustainable. “Markets clearly no longer believe that the USD-SAR peg is durable,” Peter Kinsella, an analyst at Commerzbank, concluded. “If they did, then forwards would not diverge from spot prices to any large extent.”

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

What were the real origins of the great oil crisis of the 1970s? Politics or depletion?

November 10, 2015

What were the real origins of the great oil crisis of the 1970s? Politics or depletion?

If you happen to be caught in a boat in a major storm, such as in this image by Hokusai, you’ll surely think you experiencing a major shock. However, it is also true that no storm changes the average water level of the oceans. So, the oil storms of the 1970s were perceived as major shocks, but did they change the average patterns of the world’s oil production? In this post, I argue that they didn’t. Just like a sea wave has to crash on a shore, sooner or later, so oil production had grown so fast in the 1950s and 1960s that it had to crash, sooner or later. And it did.

The oil crisis that started in the early 1970s is still widely remembered today and much of the interest in the vagaries of the present oil market is derived from a comparison with the events of that time. Yet, it may also be that the crisis was widely misunderstood while it was taking place and that it remains misunderstood even today; often reduced to the work of a small group of evil Arab sheikhs, perhaps the ancestors of today’s Daesh. But, as it often happens, every question may have an explanation that is simple, obvious, and totally wrong.

Last week, there was a meeting at the University of Venice, Italy, dedicated to this issue: what were the origins of the oil shock and of the countershock of nearly half a century ago? The conference collected for two days experts in subjects such as political science, economics, communication science, history, and more and I won’t even try to summarize for you all what was said.
…click on the above link to read the rest of the article…

Saudis Bring Oil War To Europe With Largest Price Discount Since 2009

November 5, 2015

Saudis Bring Oil War To Europe With Largest Price Discount Since 2009

With oil exports to Europe having slipped from 13% of Saudi’s total to just 10% in the last six months, The FT reports, the de facto leader of OPEC has slashed its Official Selling Price (OSP) to Europe in an effort to regain market share. Saudi lowered its OSP for its Arab light crude grade in Europe by $1.30 a barrel for December, taking its discount to the weighted average of the North Sea Brent benchmark to $4.75 a barrel – the largest discount since February 2009.

The move, as we detailed previously, is basically going after Russia’s customer base, has raised heckles in Moscow, with Rosneft CEO Igor Sechin complaining last month about Saudi “dumping” after he revealed the kingdom was selling oil to refineries in Poland.

Chart: Bloomberg

As The FT reports, the de facto leader of Opec, which produces more than one in every ten barrels of oil in the world, has been squeezed in Europe over the past year as rival producers have sent more oil to the region.

Rising shipments from Iraqi Kurdistan that are delivered into the Mediterranean via the Turkish port of Ceyhan have displaced some Saudi shipments this year, traders and analysts said, while more crude from west Africa is also flowing to Europe.

Saudi Arabia has responded by trying to find new customers, including targeting refineries that have traditionally taken the majority of their supplies from Russia and the North Sea.

The global oil market remains oversupplied by at least 1m barrels a day, a move exacerbated by both Saudi Arabia and Iraq raising production since Opec decided last year to focus on squeezing out higher cost producers rather than defending price.

Price Manipulation In The Oil Markets?

June 5, 2015

Price Manipulation In The Oil Markets?

According to Reuters, Arcadia Petroleum Ltd, and its Parnon Energy unit have settled a $16.5 million civil suit filed against them for manipulating futures prices. This comes after a prior settlement with the US Commodities Futures Trading Commission whereby both entities were banned for trading futures for three years. Whether they admitted wrong doing is unclear but the case provides more evidence that the supposed “free” capital markets in the US are far from free.

Arcadia was accused of artificially creating a shortage at Cushing, OK, then using futures and options to manipulate prices as they spiked in the summer of 2008 before subsequently crashing, along with equity markets, in time for the fall 2008 elections. The parties involved took huge long positions to drive up prices, then dumped them for a big profit. Then they took short positions to drive prices back down.

This comes on top of cases in which banks were caught manipulating LIBOR(London InterBank Offered Rate) and Foreign Exchange rates as well as theongoing probes on gold price manipulation. In all of these cases fines were issued but serious jail time, as far as we know, wasn’t.

Price manipulation is running rampant and it seems that instead of regulators issuing stiffer jail sentences to deter it, slaps on the wrist via fines are becoming more and more common. I went on record saying that the crash in oil last fall from the $70s was driven mostly by media hysteria either of their own invention or fed (no pun intended) to them by parties who stood to benefit from the fall of oil.

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

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