The Petroleum Economics Monthly

Transcription

1 The Petroleum Economics Monthly Philip K. Verleger, Jr. Volume XXXII, No. 4 April 2015 Where is the Oil? Million Barrels per Day (1) (2) History and Projections of Global Crude Oil Stock Change from Prior Quarter by EIA, Argus Media, EIG, and IEA, EIA IEA Argus EIG (3) Q1:11 Q3:11 Q1:12 Q3:12 Q1:13 Q3:13 Q1:14 Q3:14 Q1:15 Q3:15 Source: IEA; EIA; EIG; Argus Global Markets. Dollars per Barrel Brent Forward Price Curve January 23, 2015 vs. May 15, /23/15 5/15/15 45 Cash 10th 20th 30th 40th 50th 60th 70th 80th Contract Source: PKVerleger LLC. Publication Date: 6/8/ , PKVerleger LLC. All rights reserved. ISSN Reproduction of The Petroleum Economics Monthly in any form (photostatically, electronically, or via facsimile), including via local- and wide-area networks, is strictly forbidden without direct licensed permission from PKVerleger LLC. Contact Dr. Verleger at 540 Fox Run Dr, Carbondale, CO or phil@pkverlegerllc.com.

2 Where is the Oil? Philip K. Verleger, Jr. PKVerleger LLC Disclaimer: Although the statements of fact in this report have been obtained from and are based upon sources that PKVerleger LLC believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed. All opinions and estimates included in this report constitute the judgment of PKVerleger LLC as of the date of this report and are subject to change without notice.

3 Table of Contents Summary... 1 The Script... 3 Markets vs. Forecasts... 9 Where is the Oil? Is the Global Consumption Increase Rate Understated? Could Producing Countries Be Holding Oil from the Market? Is Non-OPEC Production Overstated? Explaining the Deviation from the Script A Contrarian Price Forecast Glossary Statistical Appendix List of Figures Figure 1. Estimated Global Crude Oil Inventories, Monthly Data, History from 1985 and Projection through Figure 2. Brent Forward Price Curve, December 4, 2014 vs. January 28, Figure 3. Brent Returns to Storage: Spot Contract Adjusted for Time Value of Money, 1998, 2008, 2009, 2015, and Normal Range... 5 Figure 4. Open Interest in the Three Principal Crude Oil Contracts, Weekly Data, January 2005 to May Figure 5. Long Positions of Index Investors in WTI Futures and Options Contracts, End-Month, 2011 to Figure 6. Crude Oil Stocks Held in Cushing, Oklahoma, Weekly Data, January 2014 to May Figure 7. US Commercial Crude Oil Stocks, Weekly Data, January 2014 to May Figure 8. WTI Forward Price Curve, March 27, 2015 vs. May 29, Figure 9. Commercial Crude Oil Stocks Held in Cushing, Weekly Data, January 2011 to May Figure 10. Supply-of-Storage Curve for Crude Oil Stored in Cushing Figure 11. Bakken to Brent Crude Spread (Dated Brent less Bakken), January 2013 to June Figure 12. Total US Construction Employment vs. US Gasoline Use, Twelve-Month Moving Average, 1971 to Figure 13. Total US Construction Employment vs. US Gasoline Use, Monthly Data, 2011 to Figure 14. US Consumer Spending on Gasoline vs. Consumer Spending on All Other Items, Monthly Data, 1999 to Figure 15. EIA Weekly Data on US Crude Oil Output vs. First and Final Monthly Reports, 2013 to Figure 16. Texas Oil Production as Reported by EIA and as Reported by the Texas Railroad Commission, January 2011 to March i

4 List of Tables Table 1. Global Supply/Demand Projection vs. Actual Balance, First and Second Quarters of Table 2. Global Supply/Demand Actual and Projections by Quarter for Table 3. Returns to Storage for Brent Stored at Sea after Deducting Storage Charge of $1.50 per Barrel per Month... 9 Table 4. Returns to Storage for WTI Stored at Cushing after Deducting Storage Charge of $0.30 per Barrel per Month Table 5. Relative Attractiveness of Bakken to Brent for East Coast Refiners and to WTI for Gulf Coast Refiners Table 6. Change in World Commercial Crude Oil Inventories plus Oil in Transit and Crude at Sea from End-March to End-June, 2008 to Table 7. Average of Weekly EIA US Crude Oil Production Estimates vs. First and Final Monthly Estimates Table 8. Price Forecast ii

5 Summary This report s title, Where is the Oil?, poses a question that should concern everyone involved in the energy sector. For several months, oil market pundits (economists, analysts, company spokespeople, and government officials) have warned of a developing global crude oil surplus. Early in the year, IEA economists even asserted world storage capacity might be exhausted. Today pundits still suggest we will confront a serious imbalance by year s end. The market data do not reflect these views. Since Saint Patrick s Day, prices have increased as much as thirty-seven percent from their recent lows. Some of the rise can be attributed to passive investor and speculator buying. However, speculation is not the whole story. The sharp contango observed early in 2015 has diminished. The market shift toward backwardation tells us the surplus, if any, is vanishing. The market, in short, says the pundits are wrong. Data on commercial stocks held in the United States tell a similar story. These holdings have begun to decline after rising steadily to record highs. This development is also inconsistent with the pundits vision of overabundant crude supplies. In addition, large amounts of oil are not being held at sea. Although forecasts suggest increasing volumes should be flowing onto tankers to idle in various locations for three, six, or nine months in hopes of demand and high prices returning, few have done so. Forecasts, in short, do not jive with market data. We repeat, where is the oil? The two cover graphs highlight the mystery. The top figure shows projections for stock increases by quarter derived from four published forecasts. The one below it shows the shift in the Brent forward price curve from January 23 when prices reached bottom to mid-may. As explained below, the decline in contango belies the forecasts. Our conclusion, then, is the projected surpluses have not occurred in the second quarter and are unlikely to develop in the second half of In support of this, we offer several explanations here and in more detail below that, in combination, help explicate current market behavior. These suggest market activity over the second half of this year and in 2016 could be very different from what was expected at the beginning of First, global demand is growing far more strongly than predicted. The strength can be seen in the rising price of gasoil in Europe and gasoline in the US. These increases stem predominantly from a surge in demand driven by construction activity rather than a change in consumer driving habits. Indeed, fuel use for construction projects is the largest single incremental source of oil demand. The various vehicles operated by construction workers burn great quantities of gasoline and diesel. This means an uptick in construction will boost oil use. As we note later, building activity has increased in the US and Europe. The US Environmental Protection Agency has also contributed to the increase in US oil use by cutting its renewable fuel blending requirements. Second, oil-exporting countries have held oil off the market. While this action has been forced in certain cases, some of the volumes are being kept back voluntarily. Third, non-opec production has apparently been overestimated. An accident in Mexico lowered that country s output. Forest fires in Canada combined with investment reductions have cut that nation s production below anticipated levels. Most significantly, though, the United States Energy Information Administration seems to be overestimating our domestic production. This statement from Robert Merriam, who oversees EIA s Weekly Status Report, may help explain why this is happening: 1

6 At the end of the day, the crude production numbers are a modeled number. We don t and no one really has real time information, he said. There s a long delay. 1 Evidence from the market suggests that EIA figures for current US production are too high. The likely number is probably five hundred thousand barrels per day below the 9.3 million barrels per day figure EIA issued for March 2015 on May 28. Lower US production combined with less output from other countries and consumption-level adjustments create a picture of supply and demand that is consistent with the market s observed behavior. The revised supply-and-demand balances point to a much tighter market toward the end of the year. Significant price increases should not be ruled out if this view is correct. The many observers touting the United States as the world s new swing producer, suggesting US output will increase quickly if prices rise, may soon change their tune. This issue of The Petroleum Economics Monthly begins by describing the inconsistency between consensus supply-and-demand forecasts and market behavior. The discussion focuses on the expected stock rise derived from the projections and the script the market should be following under these forecasts. Next, we focus on the market s failure to follow the script. Prices have been pushed higher by investor (speculative) activity that should promote inventory accumulation. Speculative activity also allowed producers to hedge large volumes of production. As prices increased, the market contango has declined, a development inconsistent with rising stocks. Indeed, commercial inventory data show a decrease. The lack of contango and the falling stocks indicate the market s refusal to follow the forecast script. From there we examine the various factors that may account for the market s deviation from its expected performance. Stronger-than-expected consumption growth, for example, would cut inventory accumulation, as would supply shortfalls (production below expected levels). In combination, these factors may be behind what is happening in the market today. Finally, we present a price forecast. Very low prices no longer seem likely. Indeed, much higher prices may be in the offing. 1 Catherine Ngai, What Jump? Record US Oil Output Due to Revisions, Not Rigs, EIA says, Reuters, May 28, 2015 [ 2