Where is the Oil?

Real Clear Energy ^ | June 25, 2015 | Phil Verleger

[thackney]

For several months, oil market pundits (economists, analysts, company spokespeople, and government officials) have warned of a developing global crude oil surplus. Early this 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 (when a future market price is higher than the current spot price) observed early in 2015 has diminished. The market shift toward backwardation (when the current spot price is higher than a future price) 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 stocks have begun to decline after rising steadily to record highs, a development 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, this has not happened to any great extent. Forecasts, in short, do not jive with market data.

So where is the oil? Our conclusion is the projected surpluses have not occurred in the second quarter and are unlikely to develop in the second half of 2015. In support of this, we offer several explanations that, in combination, seem to be driving 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 2015.

First, global demand is growing far more strongly than predicted. This 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. Building activity has been increasing in the US and Europe. (On a side note, the US EPA has also contributed to the US demand increase 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 US 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:

“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.”

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.

[thackney]

Avg U.S. Field Production of Crude Oil
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=4

[jjotto]

No mention of the effect on prices of long-term Middle East instability, a very big factor to ignore.

[thackney]

Predicting Middle East stability impacts on oil price is a rather difficult task at best, throwing darts likely the most accurate method.

[expat_panama]

Punditspeak aside, we're looking at one hell of a humungous surplus here.  Over the past decade oil production's almost doubled even while oil consumption's fallen by a third.  I'm seeing the crunch continuing for some time to come.

[thackney]

We don’t have a surplus in the US. We still don’t come close to meeting our own demand.

I cannot open your second link, but consumption has not fallen in the US by anywhere near that amount. We dropped from a peak in 2005 to a low in 2012 by 13%, but the demand for refined product continues to climb a little since then.

U.S. Product Supplied of Finished Petroleum Products
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mtpupus2&f=m

[privatedrive]

Or U.S. fracker-driller abilities to turn spigot on/off at will = bad news for OPEC.

[expat_panama]

oil consumption's fallen by a third. 

consumption has not fallen in the US by anywhere near that amount

From Worldpress.com--

--and emport/imports from EIA.gov:

[thackney]

oil consumption's fallen by a third.

Link blocked at my work, like the post above.

Any figure claiming oil consumption up at 20 million barrels a day is including natural gas liquids. We don't and never have used that much products refined from oil, including the refinery "leftovers".

The breakdown of the products is at:

http://www.eia.gov/dnav/pet/pet_cons_psup_dc_nus_mbblpd_m.htm

The US consumption of oil is measured in our use of refined products. That link show the history is:

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MTPUPUS2&f=M

Our use is cyclical over the years, using more in summer months. We have not dropped anywhere near a third. We peaked in 2005, dropped a bit per year to a bottom in 2012 (13% drop) and have been slowly climbing since.

[thackney]

Also, the imports have fallen mostly because our production has climbed.

But as your graph shows, we still have significant imports. We do not have a surplus. One day we might.

[expat_panama]

We do not have a surplus.

There're a lot of good reasons to say that.  As for world oil prices and the article for this thread, the writer's take seems to be that the oil market situation isn't 'serious'.   Meanwhile market realities before us show that the price of oil fell a year ago and is still selling for half what it did 5 years ago.  The numbers we're all finding here are that production/consumption patterns don't support the notion oil's price is about to bounce back up any time soon.