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An Oil Supply Shock May Be Imminent

An Oil Supply Shock May Be Imminent

  • Oil demand has remained resilient in the face of a multitude of challenges.
  • OPEC+ has fallen behind more than 3.5 million bpd on its output goals.
  • The DoE has no immediate plans to start refilling the SPR.
  • The risk of a supply shock grows as China’s economy re-opens while Russian oil is being forced off the market.

When the chief executive of Aramco said earlier this week that years of underinvestment had damaged the balance between supply and demand in the oil market, it should have been a wake-up call to those in decision-making positions. Instead, the secretary-general of the UN bashed the oil industry once again for “feasting” on record-high profits and urged governments to make them pay for this.

Meanwhile, OPEC’s production shortfall last month reached 3.58 million bpd—a figure equal to some 3.5 percent of global demand—and the United States continued to sell oil from its strategic petroleum reserve.

These seemingly unrelated news reports do have something very important in common. Both clearly suggest a supply shortfall on a global level is imminent. Throw in the news that Russia’s oil exports could fall by some 2.4 million bpd after the EU embargo enters into effect in December, and an oil shortage becomes more or less unavoidable.

Oil demand has remained resilient in the face of a multitude of challenges, and even prices of over $100 per barrel failed to curb it in any significant way earlier this year. Now, prices are somewhat tempered, but the embargo is still about two months away. Once this kicks in, prices are bound to jump because alternative supply is limited. And the U.S. will need to start refilling its SPR at some point because it is getting depleted.

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OPEC Update, September 18, 2022

OPEC Update, September 18, 2022

The OPEC Monthly Oil Market Report (MOMR) for September 2022 was published recently. The last month reported in most of the OPEC charts that follow is August 2022 and output reported for OPEC nations is crude oil output in thousands of barrels per day (kb/d). In most of the OPEC charts that follow the blue line is monthly output and the red line is the centered twelve month average (CTMA) output.

Figure 1
Figure 2

OPEC output increased by 618 kb/d in August after being revised higher in July 2022 by 37 kb/d and June 2022 output was revised up by 5 kb/d compared to last month’s MOMR. The bulk of the August increase in OPEC output (69%) was from Libya(426), with smaller increases from Saudi Arabia(160), Kuwait(37), and UAE(33). Nigeria had a decrease of 65 kb/d. The rest of the OPEC producers had small increases or decreases of less than 20 kb/d with a total increase of 25 kb/d for all 8 nations.

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OPEC Sets The Stage For Output Cuts, Sees Oil Market Tipping Into Surplus In Clash With IEA Forecast

OPEC Sets The Stage For Output Cuts, Sees Oil Market Tipping Into Surplus In Clash With IEA Forecast

Biden’s “hard-won”, post Saudi fist-bump OPEC output boost of 100K barrels may end up being not only the smallest on record, but also the shortest.

In its latest monthly report, OPEC revealed that it expects global oil markets to tip into surplus this quarter as it downgraded the outlook for demand and bolstered estimates for rival supplies. The Organization of Petroleum Exporting Countries cut forecasts for the amount of crude it will need to pump in the third quarter by 1.24 million barrels a day to 28.27 million  – according to Bloomberg, that’s about 570,000 barrels a day less than OPEC’s 13 members pumped in July.

The surprising revision, which comes at a time of unprecedented pressure by western nations in general and the US in particular on the non-Russian countries in OPEC+, conspicuously diverges from that of the International Energy Agency, which boosted its demand forecasts on Thursday as soaring natural gas prices compel companies and refiners to switch to using oil, in effect confirming what we said two days ago when we noted that Europe’s aggressive gas-oil switching amid US oil exports to Europe likely set the lows for US gasoline prices.

Specifically, in its own monthly report, the Paris-based IEA forecast that world oil consumption will increase by 2.1 million barrels a day this year, or about 2%, up 380,000 a day from the previous forecast. The extra demand that prompted the revision is “overwhelmingly concentrated” in the Middle East and Europe.

At the basis of the IEA’s upward demand revision is a surge in gas-to-oil switching. Bloomberg explains:

Natural gas prices have surged this year as Russia restricts gas flows to Europe, a move that is widely seen as retaliation for sanctions imposed over its invasion of Ukraine…

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OPEC agrees to produce slightly more oil as recession fears loom

OPEC agrees to produce slightly more oil as recession fears loom

London (CNN Business)The world’s oil-exporting countries have agreed to a tiny increase in output next month amid fears that a global recession will crimp demand.

The Organization of the Oil Exporting Countries and its allies — which includes Russia — also known as OPEC+, said on Wednesday that it would produce an additional 100,000 barrels a day in September.
This was the first OPEC meeting since US President Joe Biden visited Saudi Arabia last month. Biden urged the country — which is the group’s biggest oil producer — to start pumping more.
For months, prices have climbed as Western embargoes on Russian oil have limited global supply. Those prices have helped the world’s biggest oil companies reap record profits, even as millions face surging fuel bills.
A gallon of regular gasoline in the United States surpassed $5 for the first time in June, though prices have fallen back significantly since then.
The price of Brent crude, the global benchmark, also hit a high of $139 a barrel in March in the days after Russia invaded Ukraine, but Brent is now trading at around $100 as traders fear a global recession will hurt demand.
Brent crude and West Texas Intermediate crude — the North American benchmark — both rose initially on Wednesday after OPEC’s announcement, as oil investors expected a bigger increase in production. But prices fell about 2% by midday.
“As a production rise it is a very small percentage of overall production, and much smaller than previous months increases, and thus makes little difference to the overall supply picture,” Hazel Seftor, senior research analyst for global oil supply at Wood Mackenzie, told CNN Business.

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Energy consultancy keeps lowering worldwide recoverable oil resources

Energy consultancy keeps lowering worldwide recoverable oil resources

It’s hard to say that three years makes a trend. But one of the world’s major energy consulting firms has lowered its estimate of world oil reserves for three years in a row now.

Rystad Energy provides a publicly available analysis of world oil reserves each year. In 2020 Rystad wrote that “the world’s recoverable oil [dropped] by around 282 billion barrels.” That represented a 12.9 percent decline in just one year.  In 2021 the firm stated its analysis showed that recoverable resources declined by another 178 billion barrels or about 9.4 percent. Rystad said the decline was due in part to new modelling based on resources “at well level rather than field level.” The closer Rystad looked, the less oil there seemed to be.

In 2022 Rystad noted yet another decline of almost 9 percent in its press release headline. Recoverable oil resources dropped another 152 billion barrels. (For all estimates Rystad uses figures for crude oil and lease condensate which is the accepted definition of oil.)

With estimated recoverable resources standing at 1.572 trillion barrels, there is no seeming immediate threat to oil supplies. But the trend, should it continue, would be troublesome. There is a lot to look at “under the hood” of these estimates. Rystad reduces its broad 2022 estimate to an amount it believes could be produced profitably if oil is around $50, namely 1.2 trillion barrels. Price always matters when talking about recoverable resources. Higher prices, of course, make harder-to-get resources more likely to be profitable.

Rystad notes the lowering of investment in oil exploration as one of the culprits. This drop has been driven by the uncertainties surrounding the pandemic and a world about to be ever more stringent regarding fossil fuel emissions.

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Bigger than you can imagine

Bigger than you can imagine

What I “remember” of the 1970s is actually very limited.  Most of what I think of as “my memories” have, in fact, been generated by various retrospective media coverage of the period which provide the framework into which my scraps of memory have been slotted.  And the younger someone is, the more their view of the 1970s will have been shaped by media rather than memory.  And so, it has been all too easy for today’s lazy news coverage to frame our current woes through the lens of an imaginary 1970s.

The crisis now unfolding, however, is entirely different to the 1970s in one crucial respect… The 1970s crisis was largely artificial.  When all is said and done, the oil shock was nothing more than the emerging OPEC cartel asserting its newfound leverage following the peak of continental US oil production…

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

Worst Of Global Energy Crisis Could Be Approaching, IEA Head Warns

Worst Of Global Energy Crisis Could Be Approaching, IEA Head Warns

The bullish narrative for oil markets builds as the head of the International Energy Agency (IEA) and a new Organization of the Petroleum Exporting Countries (OPEC) report, all separately, warned Tuesday about a further global squeeze on energy supplies.

IEA Executive Director Fatih Birol told the audience at a global energy forum in Sydney that “the world has never witnessed such a major energy crisis in terms of its depth and its complexity.” 

Birol continued and offered this apocalyptic warning:

“We might not have seen the worst of it yet … this is affecting the entire world.”

He explained that the global energy system is fracturing, and many factors contribute to this, including geopolitics, such as the Russian invasion of Ukraine.

“And as a result, we see that the entire energy system is going through a crisis

“Oil, natural gas, coal, and electricity prices, they’re all going up of the roof. Why? Very simple. Russia, the country that invaded Ukraine, is the largest exporter of oil and natural gas.”

Birol also said winter in Europe would be “very, very difficult,” adding this may have severe implications for the global economy.

Besides Birol’s warning, OPEC’s first oil-market outlook for 2023 suggests no relief, and crude output would need to increase even though many of its 15 members are already pumping at or near full capacity. OPEC expects global oil demand growth to exceed supplies by 1 million b/d next year.

The outlook for 2023 indicates supply strains will persist, and increasing production is desperately needed (something the group could have trouble with because of years of underinvestment and political instability).

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

Running on Empty, Part IV

Running on Empty, Part IV

How the War between Russia and Ukraine is Destroying the Petrodollar System

Welcome to Part IV of Running on Empty, my four-part analysis of the Petrodollar system.

Part I of this series explained that the US dollar is the world’s first reserve currency that is not backed by precious metals. Instead it is backed by other people’s oil. Because of a secret treaty between the US and Saudi Arabia, petroleum can only be purchased with dollars. Every country needs oil, so everyone country needs dollars and sells imports to the US to get them. Demand for dollars has made the USD the primary American export, allowing the US to deindustrialize and financialize its economy.

Part II explained how the petrodollar has grossly enriched American asset holders (stocks, bonds, and real estate) and painfully impoverished American wage earners. Under the petrodollar system, dollars are created by private banks for profit. These dollars are recycled into the economy by OPEC nations, causing stocks, bonds, and real estate to rise. This profitable exchange is enforced by American military might, which punishes any country that seeks to exit the petrodollar system.

Part III explained that for the petrodollar system to function, America needs to be able to project power worldwide to secure international trade and enforce the system. America secures global commerce and projects military power by commanding the World Ocean, by which 90% of all goods are trafficked. To overcome America’s naval supremacy, both Russia and China have sought to establish control of the World Island, the Eurasian supercontinent that houses most of the world’s population and resources. The Russo-Ukraine War is a proxy war between the uncontested master of the World Ocean (America) and the would-be masters of the World Island (China and Russa).

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February Non-OPEC Oil Production Climbs

February Non-OPEC Oil Production Climbs

Below are a number of crude oil plus condensate (C + C ) production charts for Non-OPEC countries created from data provided by the EIA’s International Energy Statistics and updated to February 2022. This is the latest and most detailed world oil production information available. Information from other sources such as OPEC, the STEO and country specific sites such as Russia, Brazil, Norway and China is used to provide a short term outlook for future output and direction for a few countries and the world.

February Non-OPEC production increased by 303 kb/d to 49,926 kb/d. Of the 303 kb/d increase, the biggest increase came from Canada 225 kb/d. Offsetting the increase were decreases from Brazil 116 kb/d and China 92 kb/d. The Febuary 2022 output of 49,926 kb/d is 2,274 kb/d lower than the March pre-covid rate of 52,200 kb/d.

Using data from the June 2022 STEO, a projection for Non-OPEC oil output was made for the time period March 2022 to December 2023. (Red graph).  Output is expected to reach 51,038 kb/d in December 2023. This is a 536 kb/d increase over the level reported in the previous report. Note the production drop of 848 kb/d to 48,947 kb/d in April in the red graph is associated with a production drop in the former Soviet Union.

Above are listed the world’s 11th largest Non-OPEC producers. The original criteria for inclusion in the table was that all of the countries produced more than 1,000 kb/d. The UK has been below 1,000 kb/d since January 2021. 

In February 2022, these 11 countries produced 84.5% of the Non-OPEC oil. On a YoY basis, Non-OPEC production increased by 2,929 kb/d while on a MoM basis production, it increased by 303 kb/d. World YoY February output increased by 6,750 kb/d. 

Production by Country

The EIA reported Brazil’s February production decreased by 116 kb/d to 2,917 kb/d. Brazil’s National Petroleum Association reported that April’s output increased by 18 kb/d to 2,999 kb/d, reversing February’s decline. (Red Markers). 

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Running on Empty, Part II

Running on Empty, Part II

How the Petrodollar Poisoned Foreign Policy with Financial Profiteering

Welcome to Part II of Running on Empty, my three-part analysis of the Petrodollar system. Part I of this series explained what the petrodollar system is, how it came to be, and what its financial effects have been on the United States. In Part II, I’ll explain the petrodollar’s implications for foreign policy. In Part III, I’ll show how those implications paved the way for the Russo-Ukraine War, and why that’s causing the system to break down.

America’s Chief Export is the US Dollar

As explained in the previous installment, the petrodollar system is based on an agreement between the US and Saudi Arabia. Under the terms of the deal, the US guarantees the security of Saudi Arabia and in exchange, Saudi Arabia guarantees that all petroleum is sold by OPEC for US dollars, with the US dollars re-invested into America via petrodollar recycling. The result: Since everyone needs petroleum, everyone needs US dollars. Oil replaces gold as the hard backing for the dollar. 1

Since the petrodollar system was put in place, the US has enjoyed a comparative advantage in manufacturing currency that no other nation enjoys. Under conditions of free trade, a country produces and exports more of a good for which it a comparative advantage, and produces less and imports more of the goods for which it doesn’t. And that’s what has happened: Since the petrodollar system was put in place in 1973, America has produced more and more dollars and produced less and less of everything else. The dollar is today our nation’s #1 export.

How large is the circulation of US dollars? As of April 2022, the American money supply, which economists call M2, stands at $21,728 Billion Dollars. M2 includes three types of money:

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Running On Empty

Running On Empty

Well, we definitely seem to have passed a threshold of sorts. For most of the sixteen years since I started blogging, one of the things I had to point out constantly to my readers was the slow pace of historical change.  Whenever I posted an essay on the twilight of industrial society, I could count on fielding at least one comment from a reader who expected the entire modern world to crash and burn in the next few months.  I’d have to patiently remind them that Rome wasn’t sacked in a day—that it takes years of breathtakingly moronic decisions motivated by mindless greed, vicious partisan hatred, blind ideological dogmatism, and a total unwillingness to think about the long-term consequences of short-term decisions, to bring a civilization down.

Now of course all through the years while I was telling people this, decisions of the kind I’ve just described, guided by motives of the sort I’ve just characterized, were standard operating procedure throughout the industrial world.  Those proceeded to have their usual effect. I still don’t expect modern civilization to crash to ruin in the next few months, but it’s reached the point that I no longer have to tell people that the Long Descent won’t show up as soon as they think. No, at this point it’s my ironic duty to suggest that they make whatever preparations they have in mind sooner rather than later, because the world shows no signs of waiting for them.

As I write this, the most obvious set of problems has to do with the economies of the United States and its client states. Those of my readers who follow financial media already know that signs of economic trouble are elbowing one another out of the way to get to the front pages…

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

Russia’s Oil Output Is Plummeting, And It May Never Recover

Russia’s Oil Output Is Plummeting, And It May Never Recover

  • Russia’s oil output is plummeting, and the decline is expected to worsen in May.
  • OPEC recently warned that markets could see the loss of more than 7 million barrels per day of Russian oil and other liquids exports.
  • With many global producers constrained in their capacity to boost production fast, oil prices are likely to remain elevated for the foreseeable future.

Russian oil production is falling. In March, it shed half a million bpd, which by the end of April reached a full 1 million bpd, according to BP’s CEO, Bernard Looney. And this may well grow to 2 million bpd this month. These barrels may not be returning to the market any time soon. As the European Union targeted a barrage of sanctions on Moscow, oil was excluded as a direct target but financial and maritime sanctions affected the industry. Now, the EU is proposing a full oil embargo, save for a handful of member states too dependent on Russian oil to comply, and this will mean a further loss of barrels at a time when the global oil market is already stretched thin.

“We could potentially see the loss of more than 7 million barrels per day (bpd) of Russian oil and other liquids exports, resulting from current and future sanctions or other voluntary actions,” the secretary-general of OPEC, Mohammed Barkindo, told the European Union last month.

This does not appear to have made any lasting impression on the decision-makers in Brussels, who are moving full steam ahead with the oil embargo. Meanwhile, alternative suppliers would struggle to fill the void left by Russian oil.

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

OPEC Update, March 2022

OPEC Update, March 2022

The OPEC Monthly Oil Market Report (MOMR) for March 2022 was published this week. The last month reported in each of the charts that follow is February 2022 and output reported for OPEC nations is crude oil output in thousands of barrels per day (kb/d). In most of the charts that follow the blue line is monthly output and the red line is the centered twelve month average (CTMA) output.

Figure 1
Figure 2

OPEC output increased by 440 kb/d according to secondary souces in February. January 2022 output was revised higher by 52 kb/d from what was reported last month and December 2021 output was revised lower by 35 kb/d compared to the February 2022 MOMR. Most of the increase in OPEC output was from Saudi Arabia(141 kb/d) followed by Libya (105 kb/d), Iran (44 kb/d), Iraq (36 kb/d), and Kuwait (32 kb/d). Six OPEC members saw increases of less than 27 kb/d (total of 101 kb/d for that group of 6 nations). Only two OPEC nations had lower output in February with a total decrease of 19 kb/d.

In the chart below OPEC 13 crude and Russian C+C are shown, I expect that OPEC 13 crude plus Russian C + C will likely top out at about 40500 kb/d, if sanctions are not removed from Iran and Venezuela, potential future increase for OPEC 13 and Russia is about 1000 kb/d without Iranian sanctions relief. If Russia falters due to ongoing sanctions and cannot increase output from the February 2022 level, potential OPEC capacity is reduced to about 700 kb/d.

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

Could The World Really Run Out Of Oil?

Could The World Really Run Out Of Oil?

Stop staring at your gains from the energy stocks for a second here. Take a seat in a nice quiet place and ask yourself this one really simple question: if oil demand continues to grow at ~1 million b/d for the next 8-10 years, where is the oil supply coming from to meet it?

Rystad Energy, along with many others, including my friend Tracy Shuchart as well as the work of Josh Young over at Bison, show that US oil production will peak in 2023/2024. Outside of OPEC’s core members, Saudi Arabia, UAE, and Kuwait, there’s no spare capacity (with the exception of Iran).

Part of the reason we’re in this situation is because of the shale boom. If it wasn’t for the Permian back in 2016, we would already be deep into an oil supply crisis. We need another Permian, and that’s unlikely. Furthermore, we also know that shale as an industry never produced a profit. Those investors who got in and didn’t get out in time (most) all lost their shirts. Trying to kick that dead horse back to life will require horse-sized steroids. They will come with higher oil prices, but it’s not gonna happen for some time and it’s not gonna solve the immediate problem.

oil rigsWithout demand destruction, this oil supply deficit is going to be hard to control, and with it, oil prices though due a pullback here and now are going higher and for longer than many think.

Just look at the broader landscape in the oil market today. You can list the number of countries that can actually grow oil production on one hand:

  • OPEC (Saudi, UAE, Kuwait), Iraq, and Russia are now tapped out (e.g. under compliance to OPEC+ agreement)
  • US
  • Canada
  • Brazil
  • Norway

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Oil Rally Fueled By OPEC Production Shortfall

Oil Rally Fueled By OPEC Production Shortfall

  • In December, OPEC+ added 253,000 barrels daily to its combined production falling well short of its 400,000-bpd target
  • OPEC’s underproduction fuels speculation about the cartel’s ability to ramp up production
  • Morgan Stanley: global spare oil production capacity will shrink from 6.5 million bpd at the moment to just 2 million barrels daily by the middle of the year

That OPEC’s spare oil production capacity was a problem that was only going to get worse with time became clear last year when the first reports began to emerge that the cartel and its partners led by Russia are not adding as much oil to their monthly output as agreed. Now, the gap between commitment and output has deepened, adding fuel to an already strong price rally.

In December, OPEC+ added 253,000 barrels daily to its combined production falling well short of its 400,000-bpd target for yet another month in a growing row. Naturally, this fueled concern about the security of global supply amid forecasts from the International Energy Agency that oil demand is going to exceed pre-pandemic levels later this year.

This latest forecast could be confusing to many who follow the agency’s output. In December, the IEA said that oil demand growth was going to slow down this year. It also forecasted a possible oversupply on the oil market for the current quarter, citing the effect of the Omicron variant on fuel consumption and rising non-OPEC production.

To be fair, the agency noted the oversupply would materialize if several things happen, among them, Saudi Arabia and Russia pumping at record rates as “remaining OPEC+ cuts are fully unwound.” Yet it appears to have greatly underestimated the resilience and strength of demand. No wonder a lot of other forecasters are talking about oil reaching and topping $100 per barrel.

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Olduvai IV: Courage
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Olduvai II: Exodus
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