Unprecedented Oil Glut Appears Inevitable

The U.S. has voiced its concerns over the Saudi-Russian oil price war, but thus far, those concerns appear to have fallen on deaf ears. In an interview that was broadcast on CNBC, Senator Ted Cruz (R-TX) answer the question, “Do you think President Trump should try to use his influence with Russia or Saudi Arabia to try to get them to stop producing so much oil?”

“Absolutely. I think that is a major priority especially for my home state of Texas. And if you look what happened, right in the midst of the coronavirus crisis, a public health crisis that is dominating our focus, and an economic crisis that is flowing from it. Millions of people losing their jobs.

“The Saudis and Russians decided to take advantage of that crisis by flooding the market and driving the price of oil way, way down. And that was opportunistic. It was designed with a very specific purpose. The Saudis are trying to drive out of business American producers, and in particular shale producers, largely in the Permian Basin in Texas, North Dakota and in a number of oil producing states across the country.

“That behavior I think is wrong. I think it is taking advantage of a country that is a friend.

“A couple of weeks ago, I joined with thirteen senators in a letter to the Saudi Ambassador to pull back and stop trying to drive the price down to artificially low. Nine of the thirteen did a conference call with Saudi Ambassador that was as candid a call and direct a call as I’ve ever had with a foreign leader. The nine of us unloaded on her. And their defense was but Russia is doing this.

“I said but Russia is not our friend. We treat them accordingly. We are aware of their Continue reading "Unprecedented Oil Glut Appears Inevitable"

World Oil Supply And Price Outlook, March 2020

The Energy Information Administration released its Short-Term Energy Outlook for March, and it shows that OECD oil inventories likely bottomed last June 2018 at 2.802 billion barrels. It estimated stocks dipped by 5 million barrels in February to end at 2.914 billion, 44 million barrels higher than a year ago.

For 2020, OECD inventories are projected to build by 137 million barrels to 3.031 billion. For 2021 it forecasts that stocks will draw by 48 million barrels to end the year at 2.983 billion.

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The EIA estimated that OPEC production dropped by 72,000 b/d in February to 28.49 million barrels per day. For 2020, it estimates that OPEC production will average about 29.08 million, about 720,000 b/d lower than in 2019. For 2021, it estimates OPEC production average 2.941 million. The EIA did not increase its estimates for OPEC despite the announcements by Saudi Arabia that it is pushing its production up to 12 million barrels per day and the UAE is increasing its production by 1 million barrels per day.

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Oil Price Implications

I updated my linear regression between OECD oil inventories and WTI crude oil prices for the period 2010 through 2019. As expected, there are periods where the price deviates greatly from the regression model. But overall, the model provides a reasonably high r-square result of 79 percent. Continue reading "World Oil Supply And Price Outlook, March 2020"

$50 Crude Oil Not Likely To Hold

Citi is the latest to revise its estimates of the demand destruction from COVID-19. It said that it now believes inventories of crude oil could grow to 2 million barrels per day in February alone, which would put “even more sustained pressure on prices.” A week ago, the firm’s thought the potential build would be over one million barrels per day for the quarter.

Numerous sources have estimated China’s demand for crude had dropped between two and three million barrels per day since petroleum product consumption had dropped, and the profitability of running refineries had plummeted. But Goldman Sachs (GS) subsequently revised its estimate last week, that they now expect “a cumulative global stock build of 180 million barrels in 1H20, four times its pre-virus forecast.”

The Goldman forecast is based in part on an estimated hit in China’s crude oil demand of 4 million barrels per day. Goldman assumes that OPEC+ will deepen its cuts in 2Q by about 500,000 b/d.

OPEC’s Joint Technical Committee (“JTC”) met from February 4 to 6th and recommended “a further adjustment in production until the end of the second quarter of 2020” and “extending the current production adjustments until the end of 2020.” The cut would be an additional 600,000 b/d on top of the cuts announced in December.

But Russian Energy Minister Alexander Novak told reporters: Continue reading "$50 Crude Oil Not Likely To Hold"

Crude Oil: Buy Setup With 1:6 Risk/Reward Ratio

Last time I updated on the crude oil futures in May 2019, I asked if “You Were Waiting for Crude Oil at $20”. Both the weekly chart and the monthly chart had a bearish outlook as the price of crude topped at $66.60 and then it plummeted below $60. The targets were set between $32 and $22. Check out the poll results below.

Crude Oil

Most of you voted that the price would tag the former bottom of $26. As we know now, the price indeed dropped heavily, but it couldn’t break below $50 and bounced back up from there. So the majority result was the closest call, although with a considerable difference.

The chart structure had changed since then and I am happy to share with you the emerging buy setup for crude oil futures with a considerable reward opportunity. Let’s start with an updated weekly chart below to see the idea. Continue reading "Crude Oil: Buy Setup With 1:6 Risk/Reward Ratio"

Oil Outlook For 2020 Appears Challenging For Saudi Aramco

The OPEC ministers are scheduled to meet December 5th in Geneva. Their non-OPEC partners will join them December 6th. As of this writing, reports are that Russia and Saudi Arabia are not yet pushing for deeper cuts in 2020 are likely to call for full compliance by all OPEC+ participants and extend the existing quotas scheduled to end in March through June.

However, developments in non-OPEC countries may require deeper cuts to prevent glut conditions. And a couple of surprises within OPEC may doom the group’s efforts. Saudi Aramco is promising a dividend payment to IPO shareholders in proportion to a $75 billion dividend for all Aramco shareholders and will pay the new shareholders their due regardless if it is unable to pay the government its share of the dividend in full. Therefore, the Kingdom may be faced with a major financial challenge in 2020.

U.S. Supply

Higher production forecasts for the U.S. are coming under increased scrutiny and are subject to a wide variety of opinions. The base case of the Energy Dept. is a rise of 1.0 million barrels in crude production from 12.29 to 13.29 million barrels per day. It also projects an increase of 680,000 barrels per day in petroleum liquids, mainly NGLs.

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The International Energy Agency (IEA) is projecting a US increase in crude production of 1.2 million. But Goldman Sachs revised its forecast down to 600,000 b/d. And HIS Markit is even lower at 440,000 b/d. Continue reading "Oil Outlook For 2020 Appears Challenging For Saudi Aramco"