A Glimmer of Hope Amid the Oil Glut Gloom

Posted in The Petroleum Truth Report on December 8, 2015

Oil futures prices are below $38 but there is a glimmer of hope in EIA’s Short-Term Energy Outlook (STEO) released today–world consumption increased in November and supply fell.

OPEC did what everyone expected last week–nothing–and oil markets reacted badly. Brent futures fell 15% from $47.44 before the OPEC meeting on Friday (December 4) to $40.25 today (December 8). I have been saying that oil prices have been too high based on fundamentals and need to move lower in order for oil markets to balance.

Now we may be seeing the beginnings of that trend. In November, world liquids supply fell 190,000 bpd and consumption increased 320,000 bpd (Figure 1).

World Supply-Demand November 2015
Figure 1. World liquids supply and consumption, July 2013-November 2015.
Source: EIA STEO December 2015 & Labyrinth Consulting Services, Inc.
(click image to enlarge)

That lowers the production surplus (supply minus consumption) to 1.34 million bpd (Figure 2) which is not great but is a big improvement–a 520,000 bpd decrease–over October and is one of the better months of 2015.

Chart_Prod Surplus-Deficit November 2015
Figure 2. World liquids production surplus of deficit and Brent crude oil price.
Source: EIA STEO December 2015 & Labyrinth Consulting Services, Inc.
(click image to enlarge)

Most analysts are focused on the over-supply but I worry more about demand. Lower prices have forced producers to cut back and world production has been falling for the last 4 months. Demand is a tougher problem because people have to change their behavior and use more oil. Consumption is not the same as demand but it is a proxy and has increased year-over-year for 3 consecutive months (Figure 3) despite the medium-term downward trend (3-month moving average).

Chart_YOY Cons December 2015
Figure 3. Year-over-year world liquids consumption change.
Source: EIA STEO December 2015 & Labyrinth Consulting Services, Inc.
(click image to enlarge)

Although U.S. production continues to decline, the EIA has revised the amount of decrease downward over the past 2 months (Figure 4).

Chart_US Prod December 2015
Figure 4. U.S. crude oil production.
Source: EIA STEO December 2015 & Labyrinth Consulting Services, Inc.
(click image to enlarge)

U.S. production has declined 420,000 bopd since April but last month’s estimate was -490,000 bopd and the September estimate was -590,000 bopd. Although U.S. production is important, it alone will not fix the world supply surplus. At the same time, I expect it will continue to decline and EIA forecasts a decrease of 1.12 million bopd by September 2016.

It is too early for optimism. The global market remains over-supplied by 1.3 million bpd and a few months do not necessarily make a trend. At the same time, with prices now below $40 per barrel, I am encouraged that there is now the potential for progress toward market balance and eventual price recovery.


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18 comments on this entry


  1. The large VLCC may be slowing down to make a gradual turn? Interesting data from EIA. As usual, thanks for presenting it to us.


  2. Daniel,

    I assume that you mean supertanker when you use the VLCC acronym. And, yes, it is a fitting analogy.

    World opinion is focused on U.S. production that declined 170 kbpd in October but the biggest non-OPEC M-O-M liquids production increases were Canada (270 kbpd, Brazil (110 kbpd), Norway (50 kbpd), Russia (40 kbpd), Mexico (20 kbpd) and Indonesia (20 kbpd). These increases add up to 510 kbpd and over-shadow U.S. declines. Within OPEC, Libya (60 kbpd), Saudi Arabia (50 kbpd), Nigeria (40 kbpd) and Angola (20 kbpd) all increased crude oil production in October. See IEA’s November OMR for the details.

    So, I agree with you that there are lots of moving parts to the market balance problem.

    All the best,

    Art


  3. Think it’s difficult to say what’s really going on right now with demand. China’s product exports are at historic highs and inventory is building. In US demand for gasoline flat-lined compared to the great H1. Europe is probably OK and could take up some slack as the inland river transportation problem is resolved. EMs (Brazil, Russia etc) are an outright disaster and even India’s import figures weren’t great. You have a shift to energy efficiency in the MEA. Given the global economic growth and prospects for 2016, I would be worried about demand.
    On supply, sure, you got Iran coming back, but also projects that analysts think are write-offs are actually not. Kashagan is coming back onstream Dec 16. Heck, even Venezuela has been increasing number of rigs.


  4. D,

    I said that I worry about demand in the post. The fact that we have a few months of YOY encouragement does not indicate that demand is strong.

    IEA estimates that demand growth for 2015 will be 1.8 mmbpd compared with 2014, the strongest YOY growth of the new century except for 2010 (compared with the financial collapse year of 2009) and 2004 (compared with the U.S. recession year of 2003). That said, I see great weakness in the global economy and am concerned about the contraction in U.S. manufacturing reported last week.

    All the best,

    Art


  5. The only site I use for staying on top of the oil/gas markets.
    All other are speculation, hype and a general waste of time.
    Art sticks to staight forward, and reletively simple concepts.
    The work done here is appreciated.


  6. Hammer,

    Many thanks for you comments.

    Art


  7. OK, according to your response, US cut production 170k bopd in October. Mean while OPEC increased production 170k bopd in October. So much for decreasing US production. Further, the rest of the world increased production 510k bopd in October! Thanks for the continued production updates Art. Regards, Daniel


  8. Current production is 96mil BPD. If every producer cut by 3% production drops by 2.88milBPD.

    It is remarkable that producers aren’t able to balance the equation then swing to a small deficit in production. 100% of $40 is a much smaller number than 97% of $50, $60 ,$70 or $80.

    One speculation is there is a ‘conspiracy’ betwen the US and Saudia Arabia to casue as much damage to Russia , Venezuela and US Shale. Russia for geopoltical reasons. The US salivates over the day Venezuela defaults and there tens of billions in downsteam assets(Citgo, European, etc) can be seized. US big oil is waiting for the day for tens of Billions in shale bonds to default, in which case they buy the prime shale assets for pennies or dimes on the dollar.

    Regardless, the Saudi oil minister recently stated current conventional fields are declining by 4% a year and without further investment the world faces significant oil shortfalls down the road. A planned world wide recession lasting years would eliminate that problem.

    Art’s brilliant presentation ‘A Retirement Party, Not A Revolution’ should be studied and restudied. The US is the most mature oil play in the world. National governments control all the majors reserves outside the US. Art went as far to say that Exxon was in liquidation mode. This is why Exxon signed on in support of a carbon tax- to slow down oil consumption.

    The climate change racket is about taking totalitarian control of energy use. Some one said the economy is a subset of energy. Calling CO2 a pollutant is an obscenity.The atmosphere is CO2 starved. Search William Happer,phD, Bob Carter,phD, Richard Lindzen, phD for openers. 1000ppm should be the target.

    If the AGW wacks are not checked, a decades long slowdown is in the cards.


  9. Jim,

    Commodity surpluses and deficits are always just a few percent of the longer-term averages because that is how traders think and work. It makes great sense for producers to act sensibly and curtail production to achieve a better price but that is not the way that producers think and work. They are thinking only about their own cash flow needs to service debt and their needs to maintain or grow production to satisfy investors and keep stock prices high enough to avoid debt covenant thresholds based on net asset value.

    I don’t know about conspiracies between the U.S., Saudi Arabia, Russia, Venezuela etc. but conspiracies require a few things that I find generally lacking in the world namely, that governments are competent and that people can keep a secret.

    Climate change is real and I have no doubt that human activity contributes to it–how much will always be speculative but it simply cannot be good to be pumping as much crap into the atmosphere as we are. Whether or not it can be reversed is more problematic and our ability to forego fossil fuel use is even more questionable, not to mention the costs associated with that goal.

    I believe that Chris Martenson originated the slogan about the economy being a subset of energy.

    All the best,

    Art


  10. I am sure I am asking really dumb questions – but! I see that there has been a large surplus of production over consumption for about 18 months. How much storage capacity is there? Surely the surplus must revert to zero when there is no place left to put that surplus – whatever the price?


  11. Trevor,

    Total U.S. crude oil storage is ~612 mmbo and current storage is ~486 or 79%. Inventory fell 3.6 mmbo last week as we entered the seasonal de-stocking period as winter sets in.

    Speculation about running out of oil storage is always exaggerated focusing only on Cushing that represents only about 17% of total U.S. storage. Nevertheless, inventory must be reduced to somewhere near the 5-year average before oil prices can get back to normal and, of course, the U.S. is only part of the huge volume of inventory that the world holds. Inventories are high not because we cannot use all the oil produced but because the forward futures curve favors selling later rather than sooner.

    All the best,

    Art


  12. Hi Art,

    I am puzzled by your statement at the end that for US Oil production the “EIA forecasts a decrease of 1.12 million bopd by September 2016”. I have just been looking at their website and for 2015 they forecast that for “Petroleum and other liquids” the US supply in 2015 will be 14.93 mbopd falling to 14.71 mbopd in 2016, a fall of just 0.22 million bopd. Am I missing something?


  13. Keith,

    My graph is for crude oil and you are comparing that to petroleum and other liquids that includes refined products, natural gas liquids, biofuels and refinery gain, none of which are produced from the field–apples and oranges.

    I provide links and source citations in my posts to avoid this kind of confusion. The link and source is to the EIA’s monthly Short Term Energy Outlook. There you can see the distinctions between crude oil and liquids volumes.

    I hope this answers your question.

    All the best,

    Art


  14. HI Art, thanks for your reply. Sorry to be a bit dim, but I have looked at the EIA’s US “Crude Oil and Liquid Fuels” production numbers, and according to them peak production was in April 2015 at 13.961m bopd and they forecast a low next year of 13.203m bopd in Sep 2016. That is a fall of 0.758m bopd, which is still a long way from 1.12m bopd. Please can you elaborate on exactly where you have got your numbers? Thanks.


  15. Keith,

    As I explained in my reply, you need to follow my links and source citations if you want to understand the data presented. Look in the EIA STEO and go to Tab 4a. Row 7 is Domestic Production of crude oil. That is where I got the data and that represents the latest from EIA. I cannot explain why they show different data on different parts of their web site. Please ask them.

    All the best,

    Art


  16. Thanks Art, I am a big fan of your blog. Keep up the good work.


  17. Always interesting to read your view, and data.

    I have a couple questions on the graphs shown.

    1) Figure 3 year on year change in world liquids consumption shows a change of 4 M bopd in March 2015, reducing to about 3 M bopd in November. This contrasts with EIA / IEA / Opec forecasts of an increase in demand in 2015 of 1.5 – 1.8 M bopd. Is the source of the difference crude versus crude condensate and NGL liquids?

    2) Figure 4 shows EIA estimates of the reduction in crude production as -420 k. However, measuring from the graph actually shows a change from 10.18 to 9.32, a change of 860 k. Am I reading your graphh wrong or do the figures graphed differ from the text figure given?

    best wishes, Keith


  18. Further to earlier questions, Figure 1 suggests that world supply is down from 96.8 to 95.8 – a reduction of 1 M bopd between August and November. THis number is bigger than other estimates of global supply reduction. Again, is that because it refers to all liquids?

    THanks again and best wishes, Keith