The Petroleum Truth Report

My goal is to offer clear and direct explanations of energy reality. These posts are data-driven interpretations of oil and gas topics that often challenge conventional thinking.
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The Days of Cheap Natural Gas Are Over

Natural gas prices averaged a little more than $2.50 per mmBtu (million British Thermal Units) in 2016. Those days are over. Prices will average at least $3.50 to $4.00 in 2017.

Prices have more than doubled since March 2016 but gas is still under-valued. Supply is tight because demand and exports have grown and shale gas production has declined.

In April of last year, I wrote that natural gas prices should double and they did. Henry Hub spot prices increased 2 1/2 times from $1.49 to $3.70 per mmBtu and NYMEX futures prices doubled from $1.64 to $3.30 per (Figure 1).

Natural Gas Prices Have More Than Doubled Since March 2016 The Days of $2.50 Gas Are Gone

Figure 1. Natural Gas Prices Have More Than Doubled Since March 2016: The Days of $250 Gas Are Gone. Source: EIA and Labyrinth Consulting Services, Inc.

Nevertheless, gas prices are still too low. Storage was at record high levels throughout 2016 reaching 4.1 Tcf (trillion cubic feet) and 84% of working capacity in mid-December. Storage has fallen 1.1 Tcf in the last month to 61% of capacity. That is below the 5-year average (pink, dashed line in Figure 2).

Gas Storage Levels Have Fallen 1.1 Tcf To Below the 5-Year Average

Figure 2. Gas storage levels have fallen 1.1 Tcf in the last month to below the 5-year average. Source: EIA and Labyrinth Consulting Services, Inc.

Comparative inventory (C.I.) trends are the best indicators of gas price. These compare current storage to a moving average of levels for the same date over that last 5 years and correlate negatively with spot prices (Figure 3). C.I. fell 120% from May to December 2016 and gas prices doubled.

Comparative Inventories Have Fallen Sharply Since May

Figure 3. Comparative Inventories Have Fallen Sharply Since May. Source: EIA and Labyrinth Consulting Services, Inc.

There are occasional short-lived excursions from the correlation. These typically occur when the market believes there is sufficient supply for the winter heating season in September or October. The market over-shoots with lower prices that are later corrected upward.

The November 2016 price drop shown in Figure 3 is an example of this phenomenon that occurred outside of the normal September-October pattern. A similar price drop began in January 2017.

Figure 4 shows the November and January price drops as departures from comparative inventory vs. spot price trend lines.* The current trend line (May 2016 – January 2017 in red) closely resembles trends for periods when gas prices were $4.00 per mmBtu or higher (August 2011 – March 2013 in orange and March 2013 – March 2014 in purple).

Natural Gas Is Undervalued By $0.50 - $1.00-mmBtu

Figure 4. Natural Gas Is Undervalued By $0.50 – $1.00/mmBtu. Yield curves show relevant trend lines for current natural gas prices. Source: EIA and Labyrinth Consulting Services, Inc.

Recent price drops partly reflect market expectation of increased gas production in the Marcellus Shale play because of new 2017 pipeline capacity. They also suggest that the market anticipates greater tight oil and associated gas production following OPEC production cuts.

Figure 4 suggests that current gas prices are under-valued and should be at least $3.75 and probably closer to $4.00 instead of $3.27/mmBtu, last week’s average spot price.

Supply and demand fundamentals also support higher prices. Gas production has been declining since February 2016. At the same time, net imports are decreasing as pipeline and LNG exports increase.

Shale gas production is declining and conventional gas has been in terminal decline for the past 15 years. As a result, the supply surplus that has existed since December 2014 has disappeared and a supply deficit began in January (Figure 5).

Natural Gas Supply Deficit In January 2017

Figure 5. Natural Gas Supply Deficit in January 2017. Source: EIA January 2017 STEO and Labyrinth Consulting Services, Inc.

During the last supply deficit from December 2012 to November 2014, Henry Hub spot prices averaged $4.05 per mmBtu. NYMEX futures prices reached $3.93 in late December 2016 before closing at $3.20 last week. Both spot and futures prices should return to $3.75 or higher once the market recognizes the reality of tighter gas supply.

Shale gas production has declined almost 1 Bcf per day since August 2016 and all shale gas plays are in decline (Figure 6).

Shale gas production has declined 1 Bcfd since August 2016

Figure 6. Shale gas production has declined 1 Bcfd since August 2016. Source: EIA and Labyrinth Consulting Services, Inc.

Only the Marcellus and core Utica plays break even at $4 gas prices. The Marcellus has stopped growing and more pipeline capacity to better-priced markets won’t happen as quickly as some analysts believe. Although the Utica play has growth potential, it will be spread over several years and will be largely cancelled by increased exports.

Shale gas magical thinking remains strong but the paradigm of infinite, cheap supply is no longer working. There is now too much demand between power consumption and exports to keep up with declining production.

Once decline begins, it is almost impossible to turn around short of a massive drilling campaign. The requisite capital and public support are simply not there.

That means that prices will increase. Enough additional drilling will become marginally profitable to keep natural gas affordable but it is unlikely the U.S. will return to a supply surplus any time soon. The exuberant days of cheap, abundant natural gas are over.

*Developed by my colleague J. M. Bodell who has taught me everything that I know about comparative inventories.

Despite OPEC Production Cut, Another Year Of Low Oil Prices Is Likely

An OPEC production cut offers oil producers hope for higher prices in 2017. But there is a dark cloud hanging over that expectation. Global storage inventories must be substantially reduced before higher oil prices can be sustained. Some of U.S. tight oil has nowhere to go but into storage because it can neither be refined nor exported.

If all OPEC cuts take place as announced, it will be at least a year before sufficient inventory reductions allow prices to move much higher than current levels. If not, lower oil prices will last even longer.

The OPEC Production Cut and Spare Capacity

OPEC agreed to cut production in November partly because it was incapable of sustaining output at 2016 levels. Announcing a cut is a good way to cover the reality that commercial reserve limits have been reached.

Analyst narratives have created the unfounded but widely accepted belief that OPEC has a strategy, and that strategy involves a price war with U.S. tight oil producers. The cartel’s inaction since 2014 more probably reflected an unwillingness to repeat the mistake of cutting output between 1980 and 1985: those cuts had little effect on world over-supply and damaged OPEC market share and revenue.

The possibility of a production freeze  was suggested in February 2016 when oil prices were less than $30 per barrel. Expectation of OPEC action and improving fundamentals lifted prices to an average of $43 per barrel in 2016.

Failure to act in November probably would have sent prices into the mid-$30 range. As my colleague Allen Brooks remarked just after the cut was announced, this is more about setting an oil-price floor than about raising prices.

By July 2016, OPEC surplus production capacity had fallen to only 0.92 mmb/d  (million barrels per day).  The all-time low was 0.71 mmb/d in late 2004 (Figure 1).

low-spare-capacity-was-a-key-factor-in-the-opec-output-cut

Figure 1. Low surplus production capacity was a key factor in the OPEC output cut. Incremental spare capacity volumes are shown relative to the minimum levels in the time series; in this case, December 2004. Source: EIA and Labyrinth Consulting Services, Inc. Source: EIA and Labyrinth Consulting Services, Inc.

The negative correlation between oil price and OPEC spare capacity is obvious. Low OPEC surplus after 2004 along with increased demand from China corresponded to rising oil prices that reached $146 per barrel in June 2008. The exception to the correlation in late 2006 resulted from demand destruction when real oil prices (2016 dollars) exceeded $85 per barrel for the first time since 1982.

A production cut may bring higher short-term prices but it should also result in higher OPEC spare capacity, a negative factor for higher prices.

Massive Oil Inventories Are The Problem

After the 2008 Financial Collapse, declining OPEC spare capacity, falling OECD inventories, low interest rates, and record-high oil prices produced a classic oil-production bubble.

The bubble burst in 2014 as over-production resulted in swelling inventories (Figure 2).

oil-prices-collapsed-because-of-inventory-imbalance-will-not-recover-until-balance-is-restored

Figure 2. Oil prices collapsed because of inventory imbalance and will not recover until balance is restored. Incremental inventory volumes are shown relative to the minimum levels in the time series; in this case, November 2013. Source: EIA and Labyrinth Consulting Services, Inc.

There is little chance that oil prices will return to the $70-80 range that many analysts predict until OECD storage falls approximately 400 million barrels to its 5-year average. If all the announced output cuts take place and extend beyond the 6-month term of the agreement, that will take at least a year.

The idea that there was a price war between OPEC and tight oil producers arose largely from a story line that analysts promoted. It was accepted and maintained largely by American hubris.

An over-supply of oil was the enemy if there was one and it negatively affected OPEC as much as other world producers. It resulted from the longest period of high oil prices in history. Brent was more than $90 per barrel from October 2010 through October 2014.

It is true that tight oil over-production was the biggest single offender in the supply glut and price collapse but all global producers contributed their share. It is likely that OPEC would have cut production in late 2014 if Russia had agreed to participate.

Ali Al-Naimi, the Saudi oil minister at that time said, “We met with non-OPEC producers, we asked ‘what are you going to do?’ They said nothing. We said the meeting is over.”

Tight Oil Is Not A Threat To OPEC

Tight oil has never been a long-term threat to OPEC because the reserves are relatively low. EIA year-end 2015 data indicates that U.S. tight oil proven reserves are less than 12 billion barrels.

Canada’s and Venezuela’s combined oil sands reserves exceed 350 billion barrels. Oil sands are Saudi Arabia’s and OPEC’s chief reserve competition, not U.S. tight oil (Figure 3).

oil-sands-are-saudi-arabias-chief-reserve-competition-not-u-s-tight-oil

Figure 3. Oil Sands Are Saudi Arabia’s Chief Reserve Competition, Not U.S. Tight Oil. Source: EIA, Hyperdynamics and Labyrinth Consulting Services, Inc.

In fact, tight oil production is a plus for OPEC. The U.S. must import increasing amounts of OPEC heavier oil for blending in order to refine the ultra-light oil produced from tight oil plays.

OPEC’S share of U.S. imports has increased 9% since January 2015. Total U.S. crude oil imports have increased about 1 million barrels per day and most of the increase has come from OPEC countries (Figure 4).

us-crude-oil-imports-opec-dec-2016

Figure 4. U.S. Total Imports of Crude Oil and Imports From OPEC Countries Have Increased 1 Million Barrels Per Day Since Early 2015. Trend lines represent polynomial fits. Source: EIA, Labyrinth Consulting Services, Inc. and Crude Oil Peak.

Canada could provide almost unlimited amounts of heavy oil to the U.S. but the Obama Administration’s decision to block the Keystone XL Pipeline means increasing reliance on OPEC.

Another Year of Lower Oil Prices

OPEC members leaked the possibility of a production freeze in early 2016 when oil prices were $26 per barrel. Fears of further price collapse began to fade reinforced by improving fundamentals.

The U.S. horizontal rig count fell almost 250 rigs (44%) between the end of 2015 and late May 2016. The world production surplus peaked in January 2016 and moved unevenly toward market balance throughout 2016 (Figure 5).

the-world-production-surplus-peaked-in-january-2016-has-since-moved-unevenly-closer-to-market-balance

Figure 5. The World Production Surplus Peaked in January 2016 and Has Since Moved Unevenly Closer To Market Balance. Source: EIA and Labyrinth Consulting Services, Inc.

Oil prices rose to more than $50 per barrel by June but prices fell below $40 in August when an OPEC meeting in Doha failed to produce a production freeze agreement (Figure 6). Increased global output, slowing demand growth and higher petroleum products inventories also weighed on prices.

at-least-10-of-expectation-premium-is-included-in-current-oil-price

Figure 6. $10-$15 of Expectation Premium is Included in Current Oil Price. Source: EIA, CBOE and Labyrinth Consulting Services, Inc.

In late September, OPEC abandoned its market-based approach begun in 2014 and agreed to cut production. Prices moved up and down as the likelihood of a production cut waxed and waned through October and November. A deal was announced on November 30 and prices have increased from $43 to $54 per barrel mostly on sentiment.Without participation by Russia, there probably would have been no agreement to cut production.

It is clear that like the global economy, the oil-price recovery has been weak and fragile. Hope for some OPEC action has been a significant support for prices throughout 2016. There is probably $10 to $15 of “expectation premium” built into current oil prices.

Some analysts forecast $70 oil prices in 2017. I won’t recite the litany of reasons why OPEC members may cheat or that Libya and Nigeria may increase production. I am focused on the U.S. horizontal tight oil rig count that has increased 34% (85 rigs) since mid-September, 65% of which are in the Permian basin.

If two years of low oil prices have taught us anything it is that shale companies will produce oil at almost any price provided that investors give them money to drill. There does not seem to be any limit to investors’ willingness to believe that tight oil is a good bet.

There never was an over-riding strategy behind OPEC’s unwillingness to cut output over the last 2 years. More probably, it was based on a pragmatic recognition that cutting production without participation by Russia would not meet the cartel’s needs. Now that surplus capacity is exhausted and Russia has agreed to participate, a production cut makes sense.

U.S. output will rise but imports of heavier oil will be needed for blending. Excess tight oil will go into storage keeping U.S. inventories high and U.S. crude prices at a discount to Brent.  OPEC will sell heavier oil to the U.S. at higher international prices. OPEC knows this but those who are celebrating what they believe is OPEC’s surrender in a make-believe price war, apparently do not.

Permian Giant Oil Field Would Lose $500 Billion At Today’s Prices

Did you hear about the largest U.S. oil and gas field that’s in the Permian basin of west Texas?

That’s the one that’s not a field because it hasn’t been discovered yet. That’s the one whose 20 billion barrels are an estimate by the U.S. Geological Survey. That’s the one whose 20 billion barrels would lose $500 billion at today’s oil prices.

Wait a minute. What about the headlines?

Bloomberg: A $900 Billion Oil Treasure Lies Beneath West Texas Desert

USA Today: USGS: Largest oil deposit ever found in U.S. discovered in Texas

Deutsche Welle: Largest US oil and gas discovery made – USGS

Read the source–the U.S. Geological Survey.  The USGS did an assessment of the undiscovered, technically recoverable resources of the Wolfcamp shale in the Permian basin.

“Undiscovered” means what it says–it has not been discovered. It’s an estimate, an educated guess. “Technically recoverable resources” means the oil that could be produced if cost didn’t matter.

Where Did $900 Billion Come From?

Where did the $900 billion value come from? Multiply 20 billion barrels times $45 per barrel and you get $900 billion. In other words, if the oil magically leaped out of the ground without the cost of drilling and completing wells; if there were no operating costs to produce it; if there were no taxes and no royalties.

Sweet. Jeb Clampett shootin’ at some food.

In the real world, an average Wolfcamp well costs $7 million to drill and complete (Table 1 from my June 2016 post on the Permian basin plays). Average operating costs are about $12 per barrel. Severance taxes are almost 5% and the average net revenue per barrel after royalties is only 75%.

permian-economic-assumption

Table 1. Permian basin economic assumptions by play. Source: Company documents, SEC Filings and Labyrinth Consulting Services, Inc.

The Cost

The obvious question that reporters apparently failed to ask is, What is all of this going to cost?

The USGS document “Fact Sheet 2016–3092” that summarizes the Wolfcamp study includes a table that allowed me to calculate the number of wells required to produce the estimated 20 billion barrels of oil.

For each subdivision of the Wolfcamp play or “AU” (Assessment Unit), the USGS provided a calculated mean number of potentially productive acres and the average drainage area of wells. By dividing the two, I was able to determine the number of wells (shown in yellow) for each Assessment Unit in Table 2.

table-1-from-assessment-of-undiscovered-aeb_nov-2016

Table 2. Key assessment input data for six continuous assessment units in the Wolfcamp shale in the Midland Basin of the Permian Basin Province, Texas. Source: USGS and Labyrinth Consulting Services, Inc.

According to the USGS’ input data, it would take 196,253 wells to produce the 20 billion barrels if it exists. At $7 million per well, that would cost almost $1.4 trillion in drilling and completion costs alone.

It would cost more than $1.4 trillion to generate $900 billion in revenue resulting in a net loss of $500 billion at $45 oil prices excluding all operating expenses, taxes and royalties–and no discounting.

That’s a discovery that no one can afford to make.

World Oil Production In Balance, U.S. Natural Gas Production Way Down

World oil production is in balance and U.S. marketed natural gas output fell for the first time since 2005.

The EIA (U.S. Energy Information Administration) published its Short Term Energy Outlook (STEO) today. Here are the highlights.

World oil (liquids) output for September was 96.47 mmbpd (million barrels per day) and consumption was 96.39 mmbpd. That resulted in a slight surplus of 80,000 bpd, about as close to balance as it gets (Figure 1). That’s bad news considering that the Brent price of $52 per barrel acts like there are a few million bpd of surplus. So much for the global economy.

Figure 1. EIA world liquids production surplus: +0.8 mmb/d. Source: EIA October STEO and Labyrinth Consulting Services, Inc.

EIA forecasts an average production WTI price of $50/barrel in 2017 with Brent $1/barrel higher.

The long decline in U.S. crude oil production appears to be over. September output increased 60,000 bopd (Figure 2).

us-prod-oct-2016

Figure 2. U.S. crude oil production increased 0.06 mmbod. Source: EIA October STEO and Labyrinth Consulting Services, Inc.

Natural gas marketed production fell from 3.2 Bcf/d (billion cubic feet of gas per day) in 2016 but EIA expects it will magically gain 1 Bcf/d before the year is over (I doubt that).

Natural gas production continues its decline and total supply is projected to go into deficit in December 2016 (Figure 3).

steo_natural-gas-supply-deficit

Figure 3. Natural gas supply should go into deficit by December 2016. Source: EIA October STEO and Labyrinth Consulting Services, Inc.

This is the first annual decline in gas production since 2005. But never fear–EIA projects a 3.7 Bcf/d increase in 2017.

I’m not sure where that will come from given that their gas forecast is an average price of $3.07 for 2017 and the best shale gas areas need $4 while the other plays need more like $6/mmBtu.

I guess that hedges and awesome increases in productivity explain the expected production rally.

EIA forecasts gas prices  to average $3.04 for fourth quarter. Too bad the price is $3.31/mmBtu today!

U.S. Storage Filling Up with Unaccounted-For Oil

This is a joint post with Matt Mushalik, a retired civil engineer and regional planner based in Sydney, Australia, and may be seen also on his website Crude Oil Peak.

U.S. crude oil storage is filling up with unaccounted-for oil. There is a lot more oil in storage than the amount that can be accounted for by domestic production and imports.

That’s a big problem since oil prices move up or down based on the U.S. crude oil storage report. Oil stocks in inventory represent surplus supply. Increasing or decreasing inventory levels generally push prices lower or higher because they indicate trends toward longer term over-supply or under-supply.

Why Inventories Matter

Inventory levels have reached record highs since the oil-price collapse in 2014. This surplus supply is a major factor keeping oil prices low.

Current inventories are 45 million barrels higher than 2015 levels, which were more than 100 million barrels higher than the average from 2010 through 2014 (Figure 1). Until the present surplus is reduced by almost 150 million barrels down to the 2010-2014 average, there is little technical possibility of a sustained oil-price recovery.

crude-oil-stocks_5-year-avg-min-max-6-feb-2016

Figure 1. U.S. Crude Inventories Are ~150 Million Barrels Above Average Levels. Source: EIA, Crude Oil Peak and Labyrinth Consulting Services, Inc.

U.S. inventories are critical because stock levels are published every week by the U.S. EIA (Energy Information Administration). The IEA (International Energy Agency) publishes OECD inventories but that data is only published monthly and it measures liquids but not crude oil. It also largely parallels U.S. stock levels that account for almost half of its volume. Inventories for the rest of the world are more speculative.

Understanding U.S. Stock Levels

Understanding U.S. stock levels should be straight-forward. Every Wednesday, EIA publishes the Weekly Petroleum Status Report  which includes a table similar to Figure 2.

figure-2-psw-table

Figure 2. EIA publishes adjustments and defines them as “Unaccounted-for Oil.” Source: EIA U.S. Petroleum Status Weekly (Week Ending September 16, 2016), Crude Oil Peak and Labyrinth Consulting Services, Inc..

The calculation to determine the expected weekly stock change is fairly simple:

Stock Change = Domestic Production + Net  Imports – Crude Oil Input to Refineries 

Domestic production and net imports account for crude oil supply, and refinery inputs account for the volume of oil that is refined into petroleum products. If there is a surplus, it should show up as an addition to inventory and a deficit, as a withdrawal from inventory.

But that’s not how it works because EIA uses an adjustment in order to balance the books (Table 1).

table-2

Table 1. Calculation of Crude Oil Stock Change. Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc..

The logic is that estimated stock levels in tank farms and underground storage are relatively dependable and that any imbalance must be from less reliable production, net import or refinery intake data.

There is nothing wrong with adjustment factors if they are small in comparison to what is to be balanced. In the Table 1 example from September 2016, however, the adjustment is 60% of the stock change–a bit too much.

A one-off perhaps? No, it’s a permanent problem that has gotten worse during the last several years.

Figure 3 shows that crude oil supply and refinery intake of oil vary considerably on a weekly basis. The balance is cumulatively negative over time beginning with a zero balance in January 1983. That suggests that crude oil stocks should be falling over time but instead, they have been rising.

psw01_sep2016_mm_differences-between-us-crude-supply-and-refinery-intake

Figure 3. Difference between U.S. crude oil supply and refinery intake. Source: EIA Petroleum Status Weekly.

The vertical bars show the weekly crude supply from production and net imports either exceeding the refinery input requirements (positive, green) or not reaching these requirements (negative, red). The solid red line is the cumulative.

Between 1991 and 2002, the deficit increased to a whopping 1.3 billion barrels.

Looking at only recent history, an additional gap of nearly 200 million barrels developed as refinery intake exceeded crude oil supply for most of 2010 through 2014 (Figure 4).

aeb_differences-between-us-crude-supply-and-refinery-intake-2003-16

Figure 4. Difference between U.S. crude oil supply and refinery intake 2002-2016 (12-month moving average values). Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.

Adjustments were introduced in late 2001 so let’s look at the period starting January 2002 (Figure 5).

eia-adjustments-to-supply-to-reconcile-stock-changes

Figure 5. EIA adjustments to supply to reconcile stock changes. Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.

There are both upward (blue) and downward (red) adjustments. Upward adjustments resulted in a 420 million barrel stock increase over the period January 2002 through September 2016.

All together now

Expected or implied stock changes calculated from weekly crude oil balance indicate falling inventories from May 2009 through the present. Yet, EIA makes adjustments to that balance in order to match observed inventory levels. Rising inventories result after those adjustments are added to the physical balance or implied stock changes (Figure 6).

figure-6-psw-workbook-sept-2016_mm-unaccounted-for-oil

Figure 6. Unaccounted-for oil in U.S. storage: the result of adjustments to the supply balance. Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.

The green area represents the physical balance (crude production plus net crude imports minus crude refinery intake). The gray area shows the unaccounted-for (adjusted) stocks.

The adjustment for unaccounted-for oil averaged about 15% from 2002 through 2010. In 2016, almost 80% of reported stocks are from unaccounted-for oil.

When You Have Eliminated The Impossible

There is no obvious solution for the mystery of unaccounted-for oil in U.S. inventories. Possible explanations, however, include:

  1. Crude field production is underestimated
  2. Net crude oil imports are underestimated
  3. Refinery inputs are over-reported
  4. Crude oil stocks are over-reported

or any combination of those possibilities.

Production, imports and refinery inputs are taxable transactions. It is likely that reporting errors are largely self-correcting over time because of the financial incentive for government to collect its due.

State regulatory agencies are the source of production data. Their principal objective is to assess production taxes. It is unlikely that states would consistently under-estimate production and forego substantial tax revenue.

Also, producers must state crude oil production in their SEC (U.S. Securities and Exchange Commission) filings and pay federal income tax on revenues from oil sales. It seems improbable that the SEC and U.S. Treasury would consistently accept under-reported production and associated lower tax payments.

Crude oil imports are subject to both tariffs and excise taxes so it seems unlikely that the U.S. government would consistently fail to identify under-payment of those revenues.

Similarly, taxes are involved when refiners buy crude oil and sell refined products. It seems improbable that they would over-state those transactions and consistently over-pay associated taxes.

The principal components of supply balance—production, imports and refinery intake—are shown in Figure 7. In a general way, increased production and decreased imports tend to cancel each other out. Refinery intake has increased since about 2010.

Those trends determine the physical balance or implied stocks. The inescapable conclusion is that implied stocks (in light blue) are substantially less than reported stocks (in gray).

Adjustments for unaccounted-for oil are unreasonable and out of proportion to the underlying factors that determine crude oil stock levels.

components-of-unaccounted-for-oil-in-u-s-stocks

Figure 7. Components of unaccounted-for oil in U.S. storage. Source: EIA Petroleum Status Weekly, Crude Oil Peak and Labyrinth Consulting Services, Inc.

It would be speculation to blame anyone for this apparent statistical disaster. Nevertheless, there is a problem that has major implications for oil price and the reliability of reported data.

In several of his Sherlock Holmes mystery stories, Arthur Conan-Doyle wrote, “When you have eliminated the impossible, whatever remains, however improbable, must be the truth.”

We have not eliminated any impossible explanations. We have, however, eliminated the three most improbable explanations for unaccounted-for oil.

The truth—however improbable—is that inventories are probably much lower than what is reported.

Postscript

Some readers noted that EIA Weekly Petroleum Status Report (PSW) data that we used in our evaluation includes estimates of production, net imports and refinery inputs. They questioned whether EIA monthly Supply and Deposition data might resolve the disparity between implied and reported stocks described in this post.

Figure 8 shows the monthly averaged data from the PSW and implied stocks calculated from monthly Supply and Disposition data (the red line). The difference between implied and reported stocks before 2010 is less than in our original evaluation. The difference from 2010 through 2012 is approximately the same, and for 2013 through the present, the differences are actually greater.

comparison-of-implied-stocks-from-eia-petroleum-status-weekly-supply-and-disposition-monthly-data

Figure 8. Comparison of Implied Stocks From EIA Petroleum Status Weekly & Supply and Disposition Monthly Data. Source: EIA Petroleum Status Weekly, EIA Supply and Deposition, Crude Oil Peak and Labyrinth Consulting Services, Inc.

IEA-EIA Oil-Glut Bomb

IEA and EIA dropped an oil-glut bomb this month. Their September monthly reports indicate that the world continues to have a glut of oil with little hope of a balanced market in the near future.

IEA’s Oil Market Report focused on weakening demand growth for oil.Their quarterly data shows that year-over-year demand growth has decreased consistently from 2.3 mmb/day in the third quarter of 2015 to 1.4 mmb/day for the second quarter of 2016 (Figure 1). The forecast for the third quarter is only 1.2 mmb/day.

yoy-demand-growth_iea-master-2016

Figure 1. IEA world liquids demand growth is decreasing. Source: IEA OMR September 2016 and Labyrinth Consulting Services, Inc.

IEA downgraded its forecast for 2016 to an average of 1.3 mmb/day annual demand growth and only 1.2 mmb/day for 2017.

EIA monthly data from the September STEO (Short Term Energy Outlook) shows that world oil-consumption growth has declined from more than 4% in late 2015 and early 2016 to 2.1% in August 2016 (Figure 2).

consumption-growth-is-decreasing-with-increasing-oil-prices-_steo-master-june-2015

Figure 2. EIA Consumption Growth is Decreasing With Increasing Oil Prices. Source: EIA September 2016 STEO and Labyrinth Consulting Services, Inc.

EIA data indicates that maximum consumption growth as a percentage occurred when oil prices were falling into the low-$30 range and that it has weakened as prices increased into the mid- to upper-$40 range. This suggests the global economy is too weak to support oil prices in the current range.

The world production surplus increased in August because production increased and consumption decreased. The over-supply rose to +0.97 million barrels of liquids per day from near-market balance (+0.12 million barrels per day) in June (Figure 3).

world-liquids-production-surplus_steo-master-june-2015

Figure 3. EIA World Liquids Production Surplus: +0.97 Million Barrels Per Day. Source: EIA September STEO and Labyrinth Consulting Services, Inc.

Both agencies stressed that high OPEC production levels are a major cause of continued world over-supply. Iraq, Iran and Saudi Arabia have increased crude oil production by 2.74 million barrels per day since January 2014 (Figure 4).

opec-incremental-prod-since-jan-2014-aug-2016-steo

Figure 4. OPEC Incremental Crude Oil Production Since January 2014. Source: EIA September 2016 STEO and Labyrinth Consulting Services, Inc.

This is why a production freeze by OPEC would not be particularly helpful.