The U.S. Over-Supply of Oil is Ending

Transcription

1 The U.S. Over-Supply of Oil is Ending Pay-It-Forward Network Art Berman November 17, 217 Slide 1

2 The U.S. Over-Supply of Oil is Ending The U.S. Over-Supply of Oil is Ending 11 WTI Price Stocks WTI Price ($/barrel), Stocks & 5-Year Average Stocks (mmb) Negative C.I. (RHS) 5-Year Avg Stocks Oil Over-Supply Positive C.I. (RHS) Comparative Inventory (mmb) 1 Oil Under-Supply Source: EIA & Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17-5 Comparative inventory (C.I.) has been dramatically reduced in 217. Levels have fallen 165 mmb since February and are now approaching the 5-year average for the first time in nearly 3 years. The causes of the U.S. inventory drawdown are clear: increased exports of crude oil and greater domestic consumption. Slide 2

3 Comparative Inventory Yield Curve Predicts $67+ WTI Prices By January 218 Source: EIA & Data Nov. 214 OPEC decision not to cut production WTI Price ($/barrel) $115 $11 $15 $1 1 $95 $9 $85 $8 $75 $7 $65 $6 $55 $5 $45 $4 $35 $3 $25 $2 $15 $1 The U.S. Over-Supply of Oil Is Ending Comparative Inventory Has Fallen 165 mmb in mmb Mid-cycle price (5-year average) Yield Curve Price response will be more pronounced going forward because of increasing curvature of the Yield Curve Nov Nov mmb Mar-June 215 False Optimism Early 217 OPEC Production-Cut Optimism Mid-Feb 217 $5 Comparative Inventory (C.I.) Millions of Barrels $ $55 $4 Late 215-Early 216 Pessimisim (Cushing > 8% Capacity) An interpreted yield curve that correlates C.I. and WTI price is developed by cross plotting the same data without the time dimension. The yield curve may provide price solutions to inventory reduction assumptions in the near term. If C.I. continues to fall at the 9-month average of 4 mmb/week, oil prices may be approximately $67 per barrel by the end of December. If C.I. falls at the 8 mmb/week average since late September, WTI could approach levels not seen since before the price collapse in late 214. Slide 3

4 Crude Oil Exports and the Brent-WTI Spread Crude Oil Exports (mmb/d) Crude Exports Increased +.3 mm/d (+1.8 mmb/week) From Previous Week But ~1 mmb/d Less Than September-October Levels Brent-WTI spread reached $7.24 last week Brent-WTI Price Spread & 4-Week Average (RHS) $ $8 $7 $6 $5 $4 $3 $2 $1 Brent-WTI Price Spread ($/barrel) Crude Oil Exports (mmb/d) Crude Oil Exports Back Above 1 mmb/d for Week Ending November 1 Exports 423 kb/d more than in 216 & account for > 6mmb/week Net Crude Imports & 4- Week Average (RHS) 7.44 mmbpd Crude Oil Exports Have Averaged.9 mmb/d in 217 Annual Avg Annual Avg 7.1 mmbpd 98 kbpd 2.1 mmb/d Oct Net Crude Oil Imports (mmb/d) 1.5 Source: EIA & 1/1/16 2/1/16 3/1/16 4/1/16 5/1/16 6/1/16 7/1/16 8/1/16 9/1/16 1/1/16 11/1/16 12/1/16 1/1/17 2/1/17 Weekly Crude Oil Exports & 4-Week Average 3/1/17 4/1/17 5/1/17 6/1/17 7/1/17 8/1/17 9/1/17 1/1/ /1/17 $ -$1 -$ kbpd Source: EIA & Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Crude Oil Exports & 4- Week Average Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov Crude oil exports for the first half of 217 averaged.8 mmb/d but rose to 1.8 mmb/d in September and October. Increased exports now average 7-12 mmb/week and contribute substantially to reduced inventory levels. Higher export levels correlate with the increased spread between Brent and WTI prices that began in late July. Traders can sell U.S. crude oil overseas at less than international prices but at levels higher than domestic pricing allows. Record exports of 2.13 mmb/d occurred during the week ending October 27. Exports have averaged ~1 mmb/d in 217 almost double levels in 216. Slide 4

5 Crude Oil Exports and the Brent-WTI Spread Brent Premium to WTI Crude Oil Price ($/barrel) $8. $7. $6. $5. $4. $3. $2. $1. $. -$1. 5/6/16 Brent Premium to WTI At $7.24/barrel Caused By Middle East Fear Premium & WTI Transport Constraints (Now Easing Somewhat) Kurdish Referendum Sept /2/16 6/3/16 6/17/16 7/1/16 7/15/16 7/29/16 8/12/16 Brent Premium to WTI 8/26/16 9/9/16 9/23/16 1/7/16 1/21/16 Cushing Comparative Inventory (RHS) 11/4/16 11/18/16 12/2/16 12/16/16 12/3/16 1/13/17 1/27/17 2/1/17 2/24/17 3/1/17 3/24/17 4/7/17 4/21/17 5/5/17 5/19/17 Qatar restored diplomatic relations with Iran Aug 24 6/2/17 6/16/17 6/3/17 Qatar ransom to Iraqi Shi'ite militants June 5 7/14/17 7/28/17 8/11/17 8/25/17 9/8/17 9/22/17 $ Saudi Purge Oct /6/17 1/2/17 11/3/ Cusihing Crude Oil Comparative Inventory (mmb) -$2. Source: EIA & Tight oil production levels, crude oil quality and U.S. refinery blending needs are behind the WTI discount to Brent price. Most U.S. refineries are designed for international grades of oil like Brent which is heavier and contains more sulfur than WTI. The U.S. has had a surplus of light sweet oil since the tight oil boom began, and the Brent-WTI spread reached almost $3/barrel in September 211 as a result. Middle East fear premium has been an important factor since June 217. Slide 5

6 Structural Problems Getting WTI to East Coast Refineries The spread decreased to about $2.25 with the advent of rail shipments of WTI to East Coast refineries, and associated reduced light oil imports. The transport cost was reasonable when oil prices were $1 per barrel but lower oil prices after 214 resulted in a progressive decline in rail shipments. East Coast refiners increasingly relied again on imported light oil mostly from West Africa to blend with heavier grades of oil. A surplus of tight oil returned as production recovered as a result higher oil prices in 216 and 217. Surplus supply caused discounted WTI prices, and the recent increase in the Brent-WTI spread. Some of excess oil has been exported in recent weeks but the price spread persists because import levels are so far unaffected. Slide 6

7 Increased Domestic Consumption is 2 nd Cause of Inventory Drawdowns 22.5 U.S. Refined Product Consumption Fell -1.6 mmb/d This Week from 21.3 to 19.8 mmb/d (-11 mmb/week): The Main Factor in Comparative Inventory Increase 3 Csonumption (Product Supplied mmb/d) Comparative Inventory (RHS) Consumption 4-Week Avg Beginning of Inventory Reduction Annual Avg 2.1 mmb/d Beginning of Consumption Increase 21 mmb/d /3/14 3/3/14 5/3/14 7/3/14 9/3/14 11/3/14 1/3/15 3/3/15 5/3/15 7/3/15 9/3/15 11/3/15 1/3/16 3/3/16 5/3/16 7/3/16 9/3/16 11/3/16 1/3/17 3/3/17 5/3/17 7/3/17 9/3/17 11/3/17 Crude Oil + Products Comparative Inventory (mmb) Source: EIA & Consumption reached a 1-year record of 21 mmb/d during the summer of 217. August 217 consumption was 3 kb/d more than in August 216 and that difference accounts for more than 2 mmb/week of incremental inventory reduction. In fact, the increase in consumption that began in January coincided with the beginning of comparative inventory reduction that in February. Slide 7

8 Greatest Portion of Consumption is From Transportation Vehicle Miles Traveled (VMT) Growth is Slowing With Higher Gasoline Prices VMT Growth $5. $ Vehicle Miles Traveled (VMT) Growth is Slowing With Higher Gasoline Prices Slowing Growth VMT Growth $2.9 $2.8 $2.7 Thousands of Vehicle Miles (VMT) Per Person Source: U.S. DOT, U.S. Dept of Labor Statistics, EIA & Labyrinth Consulting Services, Inc Gasoline Price (RHS) Slowing Growth Rapid VMT Growth With Lower Gasoline Prices $4. $3.5 $3. $2.5 $2. $1.5 $1. Gasoline Price (September 216 $/gallon) Thousands of Vehicle Miles (VMT) Per Person Source: U.S. DOT, U.S. Dept of Labor Statistics, EIA & Labyrinth Consulting Services, Inc Gasoline Price (RHS) $2.6 $2.5 $2.4 $2.3 $2.2 $2.1 $2. $1.9 Jan- Jun- Nov- Apr-1 Sep-1 Feb-2 Jul-2 Dec-2 May-3 Oct-3 Mar-4 Aug-4 Jan-5 Jun-5 Nov-5 Apr-6 Sep-6 Feb-7 Jul-7 Dec-7 May-8 Oct-8 Mar-9 Aug-9 Jan-1 Jun-1 Nov-1 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Gasoline Price (September 216 $/gallon) U.S. travel data seems to contradict consumption data. VMT growth has slowed since mid-217. Declining Vehicle Miles Traveled (VMT) mid-25 through mid-214. High gasoline prices and Financial Collapse most probable causes. Strong VMT recovery with lower gasoline prices with oil-price collapse. Recent decline in VMT probably because of higher gasoline prices. Or, are consumption and travel data explained by late summer hurricanes? Slide 8

9 The Possible Downside of Consumption October U.S. Consumption Was 1.5 mmb/d (-45 mmb) Less Than Than In August But Has Rebounded in November Product Supplied Monthly Average (mmb/d) Source: EIA & 19. Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 August mmb Aug-16 Sep-16 Oct. 216 Oct-16 Nov-16 Dec-16 YOY 4-Wk Average (RHS) January 217 Jan-17 Feb-17 Mar-17 Monthly Average Apr-17 May-17 Jun-17 Jul-17 August mmb Aug-17 Sep Nov October 217 Oct-17 Nov Year-Over-Year Product Supplied (mmb/d 4-Week Average) Continued high U.S. consumption is the only area of concern for sustained higher oil prices. September and October consumption were considerably lower than in August. It is normal for consumption to decline after the summer driving season but the magnitude of the decline is disturbing. October consumption was 1.5 mmb/d (45 mmb/month) less than in August. That is more than the total August-to-January seasonal decline during the previous year (1.4 mmb/d, 42 mmb/month). So far in November, consumption has rebounded. Slide 9

10 Consumption Will Decrease If Gasoline Prices Increase With Higher Oil Prices Consumption becomes a greater concern if oil prices increase as much as I expect because gasoline prices will increase accordingly consumption and gasoline price are negatively related. Higher oil price means higher gasoline price and lower consumption. $7 WTI will result in almost a $1/gallon price increase above the current average retail price of $2.53 and that may depress consumption. Slide 1

11 Critical Balance Between Supply & Consumption of Crude + Refined Products 23 Critical Balance Between Supply & Consumption of Crude Oil + Refined Products Last Week Domestic Consumption Decreased 1.5 mmb/d (11 mmb/week) Field Production, Net Crude + Product Imports Increased.17 mmb/d (1.2 mmb/week) /6/17 1/2/17 2/3/17 2/17/17 3/3/17 3/17/17 3/31/17 4/14/17 4/28/17 5/12/17 5/26/17 6/9/17 6/23/17 7/7/17 7/21/17 8/4/17 8/18/17 9/1/17 9/15/17 9/29/17 1/13/17 1/27/17 11/1/17 Product Supplied (mmb/d) 11/24/17 4-week avg. 4-week avg. Supply (RHS) Consumption Field Production + Net Crude + Product Imports (mmb/d) Source: EIA & Although the large decrease in domestic consumption appears to be rebounding, this must be carefully watched since it has been the main driver of inventory reduction. Net crude + product imports are also important as refinery intakes increase following hurricane disruption. The Brent-WTI spread will largely determine crude export levels that have given a major boost to inventory reduction since the spread widened in late June. The upcoming OPEC meeting on extending production cuts will be a critical driver of momentum for in coming weeks. Slide 11

12 I am cautiously bullish on oil prices despite the recent price pullback Front-Month CL1 Futures Contract Price ($/barrel) $6 $58 $56 $54 $52 $5 $48 $46 $44 $42 Traders Vacillate on WTI Bets Nov. 6 - Nov. 2 Front-to-Back CL1-CL7 Futures Spreads Are in Slight Contago $.4 WTI CL1 Price Nov 6 Backwardation RHS Nov 17 $.2 (Spot > Futures Price) CL1 - CL7 Nov 2 Contango RHS (Futures > Spot Price) CL1 - CL7 $. -$.2 -$.4 -$.6 -$.8 -$1. Font-to-Back (CL1 - CL7) Month Contract Spread ($/barrel) NYMEX WTI Futures Price ($/barrel) $6 $59 $58 $57 $56 $55 $54 $53 $52 $51 $5 $49 $48 $47 $46 $45 $44 $43 $42 $55 NYMEX Upper Range Boundary Exceeded 1st Time Since July 215 Testing $58 Resistance But Losing Ground Lately Oil-Price Volatility (RHS) OPEC Cuts NYMEX Price $49.83 Avg Price $55 Per Barrel $45 Per Barrel 1 Oil Price Voliatility Index $4 Source: Bloomberg, Quandl, EIA & Labyrinth Consulting Services, Inc. 1/2/17 1/4/17 1/6/17 NYMEX prices exceeded $55 for 1 st time since July 215, fell back to $55 & are now vacillating. Traders recently unwound some long positions then reversed last Friday and reversed again Monday, and reversed again today. Sideways movement based on sentiment-based non-substantive news. I am cautiously bullish on prices because the Brent-WTI spread has increased and favors higher U.S. exports. Domestic consumption is the key driver for inventory reduction and despite uncertainty, looks strong for now. OPEC s cuts have taken substantial oil off the market & Saudi Arabia will keep some level of cuts in force regardless of disunity in OPEC. Expectation for U.S. production growth is exaggerated. For the near term, I anticipate prices rising perhaps more slowly than I did a few weeks ago. Peak demand is a fad concern for the medium term. Biggest concern is whether higher oil prices will dampen economic growth. 1/8/17 1/1/17 1/12/17 1/14/17 1/16/17 1/18/17 1/2/17 1/22/17 1/24/17 1/26/17 1/28/17 1/3/17 11/1/17 11/3/17 11/5/17 11/7/17 11/9/17 11/11/17 11/13/17 11/15/17 11/17/17 11/19/17 -$1.2 $41 $4 11/1/16 11/15/16 11/29/16 Source: EIA, Bloomberg & 12/13/16 12/27/16 1/1/17 1/24/17 2/7/17 2/21/17 3/7/17 3/21/17 4/4/17 4/18/17 5/2/17 5/16/17 5/3/17 6/13/17 6/27/17 7/11/17 7/25/17 8/8/17 8/22/17 9/5/17 9/19/17 1/3/17 1/17/17 1/31/17 11/14/17 Slide 12