Why The U.S. Gasoline Stock Build Was Not Surprising

Robert Boslego - INO.com Contributor - Energies

The Energy Information Administration (EIA) reported that gasoline stocks had “surprisingly surged despite heavy driving on the Memorial Day weekend.” But the 3.3 million barrel build was actually not that surprising, given the development of gasoline production capacity and the relative softness of gasoline demand.

Over the past four years, the U.S. refining industry expanded its gasoline production capacity in the United States by almost one million barrels per day. In 2013, production peaked at just below 9.5 million barrels per day. Last year, production peaked at 10.3 million. And this summer production could reach 10.5 million.

Gasoline Production

Gasoline demand growth has lagged. Peak demand in 2013 was just above 9.1 million. Last summer, demand peaked at 9.6 million, an increase of about one-half million.

But in the year-to-date, gasoline demand has been 2.9% lower than over the same weeks in 2016. Retail gasoline prices dropped to low levels in the first quarter of 2016, when crude oil prices were bottoming, and that created a surge in demand that was not repeated in 2017. Continue reading "Why The U.S. Gasoline Stock Build Was Not Surprising"

Oil Market Outlook Deteriorating for OPEC

Robert Boslego - INO.com Contributor - Energies

Arrogant OPEC members thought they could beat American shale oil producers into submission in a market share battle. But instead, they caught a tiger by the tail, and now the tiger is turning on them.

OPEC producers were bragging back in late 2014 that they had much lower costs of production than American shale oil producers and could easily win back market share by undercutting their prices. But they failed to take into account that they needed higher prices than shale oil producers because oil revenues largely support their national budgets.

Low oil prices caused huge national budget deficits in OPEC countries. They did hurt the smaller, leveraged shale producers; however, they were able to take advantage of the bankruptcy laws in the U.S., not a real option for the producing countries. Their best response is to devalue their currencies, but there are a host of economic issues associated with exercising that option.

Fresh data were reported by OPEC and the U.S. Energy Department recently. The data imply that global oil stocks will rise, instead of decline in 2017, even with the OPEC-non-OPEC production cutbacks. Continue reading "Oil Market Outlook Deteriorating for OPEC"

Oil: Is It 2014 All Over Again?

Lior Alkalay - INO.com Contributor

In the past two weeks, crude oil futures took a beating; WTI futures ended last week at $46.47 per barrel while futures for Brent crude, the global benchmark, closed at $49.47 per barrel. Both WTI and Brent contracts have now concluded a 15% and 16% fall from their respective peak prices, closing at their lowest point since the deal between OPEC oil producers and 13 non-OPEC oil producers was signed. And the outlook for oil is not encouraging as a broader analysis of both the fundamentals and technical at play reveal a worrisome pattern—a pattern of an oversupplied oil market, ready to nose dive, as it did in 2014.

At the heart of the matter, as in 2014, is the US shale oil industry. Only this time around the US shale industry is significantly more competitive. According to Ron Ness, president of the North Dakota Petroleum Council quoted by Reuters, “the cost of extracting oil at Dunn County, North Dakota, is as low as in Iran” and “the cost of producing a barrel of oil is at $15 and falling" That figure is truly nothing short of dramatic! True, the production cost at Eagle Ford and Permian Delaware facilities is higher than Dunn country. And yet this figure underpins a very important change. In the next oil slump, shale producers won't be under the same pressure to cut production. Meanwhile, oil production in America has risen to 9.29 million barrels a day and is expected to surge to 10 million barrels a day by 2018. All the while, crude oil inventories are stubbornly high. The latest data from the EIA shows crude oil inventories were at 527.8 million barrels, at the higher end of the 5-year range. In fact, as the EIA chart below shows, US crude oil inventories have been persistently above the 5-year range for some time, suggesting demand for crude in the United States is too weak to accommodate the rising supply from shale oil. Continue reading "Oil: Is It 2014 All Over Again?"

Why OPEC's Cut-Extension Is Another Blunder

Robert Boslego - INO.com Contributor - Energies

OPEC, led by Saudi Arabia, blundered when it decided to engage in a battle for market share in November 2014. It assumed it could drive American shale oil companies bankrupt and then pick up their market share.

But this strategy was destined to fail. For one thing, they didn’t take into account that American shale oil companies had hedged their future production. That protected the companies from experiencing the impact of lower prices to the extent that they had hedged.

Second, they didn’t take into account the American bankruptcy system. Companies can continue as “zombies” surviving by cutting costs to the bone, and selling assets to other companies at a discount to keep afloat. The buyers then have a lower “cost basis.”

Third, they didn’t take into account their own vulnerabilities. Sure, their national oil companies have low production costs but their oil revenues largely support the national budgets. They need high oil prices to balance their budgets, effectively making them high-cost producers (e.g., KSA about $65/b in 2017). Continue reading "Why OPEC's Cut-Extension Is Another Blunder"

Crude Oil Seasonality, Inventory Rebalancing and Production Cuts

Robert Boslego - INO.com Contributor - Energies

The historical stock build from December 2014 through July 2016, and subsequent decline from August through December has led some to conclude that global stocks had started to rebalance. Instead, the normal seasonality in stocks had been masked by the high overproduction of OPEC, but then normal seasonality kicked-in.

Global OECD inventories from past years demonstrate the normal seasonal patterns, with some variability. As shown in the graph below, stocks normal build early in the year and peak around August. Stocks normally drop from September through December.

OECD Oil Inventories 2010-14

But in 2015, the oversupply was so excessive that stock just kept building through the year. They finally peaked in July 2016, then dropped off due to normal seasonal demand. This normal pattern led to a false conclusion that the rebalancing of stocks had begun. Continue reading "Crude Oil Seasonality, Inventory Rebalancing and Production Cuts"