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Oil prices have continued their climb following a week of bullish news, and with geopolitical tensions reaching a boiling point, prices are poised to head even higher.

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Friday, May 11, 2018

Iran continues to dominate the headlines, keeping WTI above $71 per barrel and Brent at $77 per barrel as of early trading on Friday. The exchange of airstrikes between Iran and Israel is also adding to the tension. Meanwhile, aside from the huge increase in U.S. oil production, the EIA reported some bullish figures this week – a decline in both crude oil and gasoline inventories by more than expected.

OPEC sees Iranian outage as not immediate. Any loss of supply from Iran due to U.S. sanctions will take time, and OPEC won’t rush to increase output in the interim, sources told Reuters. The steep losses from Venezuela combined with the potential disruption in Iran could force OPEC to adjust production levels earlier than it had expected. But because U.S. sanctions don’t really take effect until November, OPEC is not scrambling just yet. “I think we have 180 days before any supply impact,” an OPEC source said. They will meet in Vienna in a month to evaluate the current status of the oil market and the production limits.

Short-term supply glut eases Iran fears. Although supply outages from Iran could severely tighten the oil market, Bloomberg reports that there is currently a bit of a supply glut, which should prevent a sudden price spike. Oil traders have reported unsold cargoes in north-west Europe, the Mediterranean, China and West Africa. The sudden emergence of a temporary glut is reflected in the Brent timespreads, with the July-August spread falling from 63 cents per barrel last month to just 24 cents per barrel this week, a five-month low. The narrowing of the spread is a “sure sign of an oversupplied market,” Bloomberg reports.

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Oil Production Vital Statistics April 2018

May 4, 2018

Oil Production Vital Statistics April 2018

On the World stage, momentous events are unfolding. The USA, UK and France have bombed Syria risking confrontation with Russia. The Israelis are more than a little concerned about Iranian involvement in Syria. And on the Korean peninsula, peace between N and S is on the cards spreading prosperity and more energy consumption for all. On the second tier, oil production in Venezuela and Mexico continue to tank. No one should be surprised, therefore, that Brent has breached $74/bbl. The only thing standing in the way of another severe oil price spike is the N American frackers going back more seriously to work. They may one day be joined by frackers in Saudi Arabia, China and Russia.

The chart below from the February OMR is one of the more important produced by the IEA showing the balance between supply and demand leading to either stock draw or additions. So important in fact that I have decided to leave it there from the last report 2 months ago so that it can be compared with the equivalent chart from the April OMR that is reproduced just below it.

The difference between the two charts are quite subtle but with dramatic impact. Data revisions result in crude oil stock draws for 7 quarters backdated from 4Q 18. This has meant that the IEA now sees OECD crude oil stocks at the 5 year mean at the present day. The momentum of the trend will see OECD crude oil stocks shooting to the low side. Even higher oil prices may be on their way.

Readers should note that since January 2018 I have been employed as a consultant at ETH Zurich. ETH are a well-kept secret, but are in fact the number 10 ranked university in the world, up there with CalTech, MIT and Imperial College.

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Will Higher Oil Prices Destroy Demand?

May 4, 2018

Will Higher Oil Prices Destroy Demand?

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.

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

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China’s Growing Oil Demand Has Created A Geopolitical Dilemma

May 3, 2018

China’s Growing Oil Demand Has Created A Geopolitical Dilemma

China has become the world’s largest oil importer, and despite establishing the largely successful yuan-denominated oil futures, Beijing will have to grapple with an overlooked geopolitical and economic consequence as it seeks to quench its thirst for oil and gas.

As China relies more on both foreign crude oil imports and imported gas in the form of LNG and piped gas from neighboring countries, the outflow of petro-dollars or in this case petro-yuan will see the country contend with the decades-long dilemma that the U.S. faced; a massive transfer of capital to foreign oil producers.

Worse yet, for the U.S. at the time of its foreign oil import dependence, the transfer of funds was often to less-than-friendly Middle Eastern oil producers, including Saudi Arabia who in the 1970s and 80s could arguably have been called a quasi-friend or at least an ally of convenience. The U.S. needed Saudi oil as American oil production continued to decline while U.S. oil consumption spiked to unprecedented levels. For their part, the Saudis needed, and still do, the U.S. Navy’s 5th to keep open vital shipping lanes including the world’s most important maritime chokepoint, the Strait of Hormuz, to allow the export of massive cargoes of crude to foreign markets.

China’s insatiable oil thirst

China surpassed the U.S. in annual gross crude oil imports in 2017 by importing 8.4 million barrels per day bpd compared with 7.9 million bpd of U.S. crude oil imports. China had become the world’s largest net importer (imports less exports) of total petroleum and other liquid fuels in 2013. New refinery capacity and strategic inventory stockpiling, combined with declining domestic production, were the major factors contributing to its recent increase in imports.

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Can India Break Its Oil Addiction?

April 30, 2018

Can India Break Its Oil Addiction?

India is one of the world’s largest oil consumers, accounting for around 4 percent of global consumption. Only the U.S. and China outrank India in this regard, making it a key player in the oil market.

While India’s oil consumption has seen remarkable growth in the past few years, the recent rise in oil prices may soon force the nation to scale back its reliance on oil importation. In this new oil price environment, continued import growth would put a significant strain on the country’s economy.

India’s Prime Minister, Narendra Modi, has largely benefitted from the slump in oil prices over the last three years, exploiting the low prices by levying a heavy tax on this key commodity. Before Modi came into office, Brent crude averaged $99.43 a barrel. In his very first year, that figure fell by 42 percent before hitting historic lows the following year when WTI dropped below $27.

As the economy has benefited from high taxation on petroleum and diesel, India has experienced a retail energy price significantly higher than that of its South Asian neighbors – with taxes accounting for half of the total retail cost of fuels in India.

As the price of oil fell, the Indian government increased the excise duty on gasoline nine times over the course of three years. The failure of the government to pass these savings on to the consumer resulted in the alienation of the poorer classes of Indian society.

At present, there is a $10.2 billion difference between the market and retail price of oil in India. This gap has led to India having one of the largest state supported societies in the world, with only Saudi Arabia, Iran, Venezuela and China spending more on state support.

A False Economy

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Goldman: Oil Demand Will Continue To Soar

April 25, 2018

Goldman: Oil Demand Will Continue To Soar

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.

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

April 15, 2018

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

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.

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Has The World Started To Kick Its Oil Addiction?

April 9, 2018

Has The World Started To Kick Its Oil Addiction?

Until a decade ago, most of the world was a captive customer of oil—consumers would pay any price for gasoline and oil demand was soaring regardless of the surging oil prices.

But recently, many countries around the world have started to show more sensitivity to oil prices—oil demand grows as their economies grow, but oil demand is also more susceptible to oil price swings, with the oil price-consumption correlation behaving more like an everyday product, according to data by Washington-based ClearView Energy Partners and research by Bloomberg Gadfly columnist Liam Denning.

Although it’s at least a decade or more too early to call the end of the world’s oil addiction, the research and data suggest that in a growing number of large oil-consuming economies oil demand now correlates negatively with oil prices. In other words, consumption drops when prices rise and vice versa—a common economic concept applicable to almost every other product on the market.

With oil, this has not always been the case.

ClearView Energy and Denning analyzed data for three 10-year periods ending in 2006, 2011, and 2016, respectively.

During the first 10-year period until 2006, countries comprising four-fifths of oil demand, including the United States, India, China, and Russia, showed a positive correlation between oil demand and their gross domestic product (GDP) and between demand and oil prices. In the decade before the financial crisis in 2007-2008, oil demand soared almost everywhere in the world, despite the fact that oil prices were also rallying. This was the period of Chinese industrialization and construction boom which gobbled up oil at any price. In most of the world, the picture was the same—oil demand rose together with rising economies and with rising oil prices, suggesting that those countries were captive customers of oil.

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Trade War Looms Over Oil Markets

April 4, 2018

Trade War Looms Over Oil Markets

Oil prices, along with equities across the board, were dragged down on Monday over fears of a brewing trade war.

China announced $3 billion of tariffs on U.S. goods, including pork and recycled aluminum. The move came as a retaliation to the Trump administration’s 25 percent tariff on steel and aluminum imports. China’s tariff announcement on Monday sent global financial equities careening downwards, and the losses were likely magnified by President Trump’s Twitter attacks on Amazon, which sparked a selloff in tech stocks.

Fears of a global trade war are again on the rise. The worrying thing is that China’s tariff measures on Monday were somewhat narrow, and only came as retaliation to the steel/aluminum tariffs, not the $60 billion in tariffs the Trump administration announced more recently, which specifically targeted China.

Chinese officials reiterated a desire to avoid a trade war, but China might not hold its fire forever, and the government could be preparing a larger set of trade tariffs in response. In other words, there is a decent chance that the trade dispute continues to escalate.

That is bad news for oil prices. The case for oil going higher largely hinges on exceptionally strong demand scenarios for 2018. “Our latest forecast suggests that demand will grow by 1.7 million b/d in 2018, the fifth-highest this century,” WoodMac said in a recent note. A trade war would seriously upend that forecast.

“The retaliation from China is concerning for energy markets,” said Michael Loewen, a commodities strategist at Scotiabank in Toronto, according to Bloomberg. “If a trade war occurs between these countries and it affects demand growth from emerging markets, that could be a big problem.”

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India Will Lead Global Oil Demand By 2035

February 20, 2018

India Will Lead Global Oil Demand By 2035

Oil market participants and analysts have been closely watching the record level of supply coming out of the United States that is threatening to undo OPEC’s production cuts. But in the latter part of 2017 and early in 2018, robust oil demand growth — both in emerging markets and OECD economies — has supported oil prices as much as the cartel’s production restraint and the weakening U.S. dollar.

Traditionally, all eyes have been fixated on China and the pace of its oil demand and imports growth, but lately India has grabbed global attention after its oil imports rose to record highs amid strong economic growth and fuel demand. Projections of India’s long-term energy and oil consumption are also optimistic, and India is already a major oil demand growth driver.

In China, January crude oil imports jumped to a new record of 9.57 million bpd, but forecasts of slower GDP growth are making analysts wary of overly optimistic projections. China’s crude oil demand growth could slow down this year to 4.2 percent from 5.5 percent last year, according to S&P Platts analysts.

In India, high refinery runs and expanding refining capacity amid a strong recovery in demand pushed crude oil imports to a record 4.93 million bpd in January 2018, up by double digits compared to both December 2017 and January 2017, according to data compiled by Thomson Reuters Oil Research & Forecasts.

Although the January imports figure may have a seasonal explanation, with spring refinery maintenance approaching, longer-term projections and Indian refinery expansion plans support the view that oil demand growth will be strong. India plans to boost its crude oil refining capacity by 77 percent by 2030 to meet its growing fuel demand.

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Peak Oil Demand Is A Slow-Motion Train Wreck

January 19, 2018

Peak Oil Demand Is A Slow-Motion Train Wreck

Will oil demand peak within five years? 15 years? Or not until 2040 or 2050?

The precise date at which oil demand hits a high point and then enters into decline has been the subject of much debate, and a topic that has attracted a lot of interest just in the last few years. Consumption levels in some parts of the world have already begun to stagnate, and more and more automakers have begun to ratchet up their plans for electric vehicles.

But the exact date the world will hit peak demand kind of misses the whole point, argues a new report, which is notable since it is coauthored by BP’s chief economist Spencer Dale, along with Bassam Fattouh, the director of The Oxford Institute for Energy Studies.

They argue that the focus shouldn’t be on the date at which oil demand peaks, but rather the fact that the peak is coming at all. “The significance of peak oil is that it signals a shift from an age of perceived scarcity to an age of abundance,” they wrote. In other words, oil won’t be on the only game in town when it comes to fueling the global transportation system, which will have far-reaching consequences for oil producers and consumers alike.

The exact date is unknowable, and in any event, the year in which the world does hit peak consumption won’t result in some abrupt “discontinuity of behavior,” the report argues. Demand growth will slow and then decline, but probably won’t fall off a cliff. So, the exact date of peak oil demand is “not particularly interesting.”

Nevertheless, the implications of a looming peak in oil consumption are massive. Without an economic transformation, or at least serious diversification, oil-producing nations that depend on oil revenues for both economic growth and to finance public spending, face an uncertain future.

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Is The Oil Glut Set To Return?

December 14, 2017

Is The Oil Glut Set To Return?

For the second month in a row, the IEA has poured cold water onto the oil market, publishing an analysis that suggests 2018 could hold some bearish surprises for crude.

The IEA’s December Oil Market Report dramatically revises up the expected growth of U.S. shale, which goes a long way to torpedoing the excitement around the OPEC extension.

Late last month, when OPEC agreed to extend its production cuts through the end of 2018, the U.S. EIA came out with data – on the same day as the OPEC announcement – that showed an explosive increase in shale output for the month of September, up 290,000 bpd from the month before.

Although there is a time lag on publishing production data, the huge jump in output in September, plus the spike in rig count activity over the past few weeks, points to strength in the U.S. shale sector. Against that backdrop, the IEA predicted that non-OPEC supply would grow by 1.6 million barrels per day (mb/d) in 2018, a rather significant upward revision of 0.2 mb/d compared to last month’s report.

Adding insult to injury for OPEC, the IEA sees oil demand growing by just 1.3 mb/d. In other words, supply will grow at a faster pace than demand next year, opening up a global surplus once again. “So, on our current outlook 2018 may not necessarily be a happy New Year for those who would like to see a tighter market,” the IEA said. The surplus will be front-loaded – the first half of the year will see a glut of about 200,000 bpd.

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U.S. Oil Has One Fatal Weakness

November 29, 2017

U.S. Oil Has One Fatal Weakness

U.S. crude oil production is again on the rise, and exports of American crude are smashing records.

But most of the U.S. oil production is light tight oil, and American exports—especially those of very light sweet crude—may hit a demand constraint next year, Bill Barnes, director of energy consultancy Pisgah Partners, writes in Petroleum Economist.

Oil production in the U.S. is currently expected to reach an all-time high at an average 9.9 million bpd next year. In recent weeks, U.S. crude oil exports beat records, and surpassed the 2-million-bpd mark for the first time ever in the week to October 27.

Last year, 51 percent of the 8.4 million bpd of crude oil produced in the Lower 48 States was light oil, or less dense oil with an API gravity of 40.1 or above, EIA data shows. The higher the API gravity, the lighter the oil. So far this year, much of the lower 48 states’ crude oil production had 30.1 or higher API gravity.

Due to the wide discount of the U.S. benchmark WTI to Brent in recent months, American exports have seen record-high levels.

Yet, according to Pisgah Partners’ Barnes, there are several demand and supply factors that may limit the buyers’ willingness to import extra light U.S. oil.

One is that Libya and Nigeria—the two members exempt from OPEC’s production cuts—have started to gradually recover their production that had been plagued by militant and civil strife last year. And they are exporting light sweet crude oil varieties to refiners.

Also, consumption of various oil products outside the U.S. “argue for processing middle-gravity crudes such as Arab Light, Iranian Light and Russian Urals, rather than extra-light barrels such as 48°API gravity Eagle Ford,” Barnes said.

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IEA Pours Cold Water On OPEC Optimism, Warns Global Oil Demand Shrinking

November 14, 2017

IEA Pours Cold Water On OPEC Optimism, Warns Global Oil Demand Shrinking

Pouring cold water on yesterday’s optimistic demand forecast projected by OPEC, which projected global crude demand growth to rise by 1.5mm b/d in 2018, this morning the International Energy Agency warned that the crude oil price rally could be short-lived because, contrary to OPEC’s expectations, global oil demand will be weaker than expected this year and next. In its closely watched monthly oil report, the IEA cut its crude demand growth outlook by 100,000 barrels a day for 2017 and 2018, as the WSJ reported. The agency now expects demand to grow by 1.5 million barrels a day this year and 1.3 million barrels a day next year.

The IEA predicted that balances will likely show the crude market is oversupplied in Q4 2017 and the first half of 2018, with oil demand in 2017 at 97.7mmb/d, rising to 98.9 million in 2018. Meanwhile, non-OPEC Oil Supply is expected To rise by 700,000b/d In 2017 To 58.1mmb/d, and another 1.4 mmb/d in 2018 to 59.5mm b/d, led by shale output.

The IEA also noted that global oil inventories fell 63mm barrels In Q3, only second quarterly draw since 2014, with the call on OPEC crude seen at 32.6mmb/d in Q4, declining to 32.0mmb/d in Q1 2018.

However, “the highlight of the report was that they lowered their demand forecast,” said Jens Pedersen, senior analyst at Danske Bank. The report also cautioned that “if the geopolitical concerns calm down, then prices could fall down again, so on the margin it’s a tad bearish.”

The IEA noted that oil prices have risen roughly 20% since early September with Brent crude sustaining gains above $60 a barrel in recent weeks, on the back of supply disruptions and geopolitical tensions in the Middle East. But if those problems prove temporary, a “fresh look at the fundamentals” would likely show the “market balance in 2018 does not look as tight as some would like and there is not in fact a ‘new normal.’”

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OPEC Reports 151Kbpd Drop In October Crude Output; Raises Demand Forecast For 2018

November 13, 2017

OPEC Reports 151Kbpd Drop In October Crude Output; Raises Demand Forecast For 2018

True to its perpetually optimistic form, OPEC, which only last week for the first time conceded the threat posed by rising US shale production…

… sharply raised its demand forecast for cartel oil in 2018, ahead of a key meeting of the group’s ministers later this month. According to OPEC’s monthly market report, the oil exporters said the forecast demand for its oil next year had been increased by around 400,000 barrels a day from the previous month to 33.4mmbpd, about 0.46mmbpd higher than in 2017. Overall, the cartel now expects global demand growth to rise by 1.53 million barrels a day in 2017 – an upward revision of 74kbps from the October report citing better than expected performance from China – and 1.51 million barrels a day in 2018.

The increase comes on the back of the recent global economic strength, which has exceeded many analysts’ expectations, helping to draw down inventories that built up during the crude glut since late 2014. Furthermore, the rise in demand has combined with the 1.8mmbpd in production cuts by OPEC and non-OPEC nations since January of this year to help tighten the market, pushing the price of Brent back above $60 a barrel for the first time in two years.

As the FT adds, cartel analysts said demand for Opec crude is expected to reach 34m b/d in the second half of next year, roughly 1.4mmbpd above what they pumped last month, according to secondary sources. As usual, oil demand is contingent not only on overall confidence (i.e. the stock market), but also whether the global economy is expanding or contracting, which all boils down to whether China is creating lots of new debt each month.

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