Oil Prices Break-Out of Trading Range

Robert Boslego - INO.com Contributor - Energies


Oil futures prices have broken above the trading range where they have been since February when the market was expecting supply and demand would balance quickly as a result of the OPEC/non-OPEC deals. But those hopes were dashed because the global demand was in a seasonal decline, and inventories remained stubbornly high.

Prices managed to break higher due to a combination of circumstances:

U.S. and Global Inventories

Hurricane Harvey in the U.S. Gulf of Mexico (GOM) disrupted refinery operations, causing product stocks to draw rapidly. It was followed by Hurricane Nate, which disrupted crude oil production in the GOM.

In addition, U.S. crude exports reached record levels recently, averaging 1.744 million barrels per day (mmbd) over the past four weeks, a gain of 293 % from the same weeks a year ago. Petroleum product exports have also been strong, averaging 5.125 mmbd in the same period, up 23% v. a year ago.

Together, these trends have reduced U.S. inventories by 40 million barrels since the week ending September 8th. Global OECD stocks have dropped about 51 million barrels from May through September, though this is largely due to normal seasonal trends. Continue reading "Oil Prices Break-Out of Trading Range"

Hurricanes Delivered A One-Two Punch To OPEC

Robert Boslego - INO.com Contributor - Energies


OPEC’s grand plan to cut production to drain blotted global oil inventories was a miserable failure in the first half of 2017. Total OECD stocks actually rose by about 75 million barrels by end-June from when the deal went into effect beginning in January.

HE Mohammad Sanusi Barkindo, OPEC Secretary General
HE Mohammad Sanusi Barkindo, OPEC Secretary General (c), with Mr. Nader Sultan, Director of the Oxford Energy Seminar (r), and Professor Roger Ainsworth, Master of St Catherine's College. Source: OPEC

But seasonal oil demand shifted into high gear in July and August. Inventories in the U.S., the largest oil consumer and the most data-transparent country in the world, dropped about 35 million barrels, given record-high demand for crude at U.S. refineries and relatively strong mid-summer product consumption.

This brief hiatus to OPEC’s failure to drain stocks in the first half of 2017 was already set to reverse when refineries performed their fall maintenance, reducing crude demand, and the summer driving season came to a close. But the two hurricanes, Harvey and Irma, accelerated the demand-destruction process.

About 3.2 million barrels a day (mmbd) of refinery throughputs were reduced by the Gulf hurricane, while petroleum product demand dropped 1.5 mmbd from the prior week. The impact of Irma on Florida and elsewhere in the Southeast is still uncertain and ongoing. Goldman Sachs has estimated that U.S. petroleum product demand may be nearly 900,000 b/d lower in September, and 300,000 b/d lower in October, as a result of the storms. Crude demand may average another million barrels per day lower due to problems reported at some refineries. Continue reading "Hurricanes Delivered A One-Two Punch To OPEC"

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"

OPEC's Rollover Of Deal May Be Full Of Holes

Robert Boslego - INO.com Contributor - Energies


Crude oil was the worst-performing asset in the first quarter of 2017, losing 5.9 percent. That period coincided with the first three months of the OPEC-non-OPEC production cutbacks, which were intended to reduce global inventories and support oil prices.

Instead, global stocks increased from end-December through February. And U.S. crude stocks built by a staggering 57 million barrels through March. In addition, based on the Energy Department’s weekly data, U.S. crude production rose by 429,000 b/d from end-December through end-March. The Saudi Energy Minister, Khalid Al-Falih, had said during the OPEC press conference on December 10th that he did not expect any increase in U.S. production for all of 2017.

Khalid A. Al-Falih
Source: OPEC

Saudi Arabia claimed to cut its production effective January 1st, but crude imports from KSA to the U.S. soared until the final week of March. In the YTD through March 24th, imports were up by 17% from the same period in 2016, and by 30% from December. Continue reading "OPEC's Rollover Of Deal May Be Full Of Holes"