For Oil Price, Bad Is The New Good

Posted in The Petroleum Truth Report on June 12, 2015

Lately, oil prices have gone up when they should have gone down. In the last week, OPEC decided not to cut production and the two major energy agencies reported that the world over-supply problem is getting worse.  Brent futures increased from $62 to $65. Bad is the new good.

The expected bad news on Friday, June 5 that OPEC would not cut production was skillfully cloaked in positive statements about growing demand. On Monday, June 8, Brent opened at $62.69 and rose to $65.70 over the next two days.

On Tuesday, June 10,  the EIA published its monthly Short-Term Energy Outlook (STEO) that showed that the production surplus responsible for low oil prices had increased in May to almost 3 million barrels per day (bpd).

World Liquids Production Surplus or Deficit & Brent Crude Oil Price_June 2015
Figure 1. World liquids production surplus or deficit and Brent crude oil price. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Production fell by 106,000 bpd but consumption fell more by 156,000 bpd (Figure 2). Oil prices rose $2.19 per barrel based on that good news.

World Liquids Production, Consumption & Brent Crude Oil Price_June 11 2015
Figure 2. World liquids production, consumption and Brent crude oil price.Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

On Thursday, June 11, the IEA came out with its Oil Market Report. The message was the same. The production surplus for the first quarter of 2015 was the highest in a decade at 1.85 million bpd and, obviously, the highest since the oil price crisis began in June of last year (Figure 3).

IEA Chart_Surplus-Deficit 11 June 2015
Figure 3. World liquids production surplus or deficit. Source: IEA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

The oil-price crisis occurred because supply (production) exceeded demand (consumption) beginning in the first quarter of 2014 (Figure 4). That situation has persisted. First quarter 2015 supply was about the same as fourth quarter 2014 but demand was lower, not a good thing.

Chart_IEA Quarterly Liquids Supply & Demand_June 2015
Figure 4. IEA quarterly liquids supply and demand. Source: IEA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

There is optimism about demand but what is that based on? It’s based on increased vehicle miles travelled in the United States. I agree that is a good sign but the U.S. is not the entire world.

There is optimism about decreased U.S. rig counts but U.S. production has increased. The EIA estimates that tight oil production will decline by 91,000 bopd in July but that is more than balanced by new lower Tertiary production in the Gulf of Mexico.

There is optimism because there have been inventory withdrawals in the U.S. but those always occur at this time of year.

I agree with all of this optimism but it is basically well-informed sentiment. The hard data is that we have a production surplus in the world that is getting worse, not better–unless the data from IEA and EIA is somehow unreliable.

Markets don’t always behave rationally. Oil prices do not always reflect fundamentals like supply and demand. Over time, however, markets come into balance with fundamentals. Right now, oil prices are profoundly out of balance with fundamentals. Look for a correction.


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4 comments on this entry


  1. Mr Berman,

    You have expressed negative sentiments towards the fracking industry in general.
    My question to you is regarding conventional oil.

    With the current over supply, how does this fit in to the notion of peak conventional oil or don’t you buy in to the notion of peak convemtional oil?

    Would appreciate your opinion.

    Thanks.

    Craig.


  2. Craig,

    My “negative sentiments” about tight oil are about its cost and profitability. Peak oil is a valid observation but is commonly misapplied to all vs. conventional oil. Perhaps a better way to think about it is inexpensive vs. expensive oil.

    The current over-supply of oil is mostly because of expensive oil production and, therefore, has no relevance to peak oil although cornucopian thinkers enjoy saying that peak oil is an incorrect observation in light of the over-supply. Those people display both their ignorance and failure to grasp that the earth has finite resources despite technology. My point is that technology is fine but it has a cost.

    The recent surge in OPEC production has, in fact, resulted in a new peak for conventional oil.

    I recommend that you read my friend Tad Patzek’s thoughts on “There Must Not Be Peak Oil.”

    Thanks for your comments,

    Art


  3. Why do you think the prices dropped in early July? Is it just markets working things out (coming back to reality on the supply demand views and that we need to cut more rigs from those pesky shale cowboys) or is it the result of things in July: Greece/China/Iran.


  4. Nony,

    I believe that I answered your question in my post:

    “Oil prices dropped sharply this week as news of the Greek financial crisis and the free fall of Chinese stock exchanges suggested weaker demand for oil as the global economy falters. The EIA demand data does nothing to change this troubling economic outlook but it does confirm the seemingly obvious notion that low oil prices result in greater consumption.

    “In recent posts, I have emphasized that falling global demand for oil is key to OPEC’s strategy to keep prices low for some time. The July STEO underscores this problem for two key markets–the Asia-Pacific region–29% of world consumption–that includes China, Japan and India, and the United States–21% of world consumption. Growth in Asia has slowed from 7% annually in 2012 to only 2% today (Figure 4).”

    Oil prices fell because events in Greece and China show the weakness of the global economy. A weak global economy means weak demand for oil as well as other goods.

    Prices rose based into the mid-$60 range based on sentiment, momentum and confirmation bias that the world was on its way back to business as usual. As I wrote in earlier posts last month:

    For now, however, we have crossed a boundary and notions of normal or business-as-usual should be put aside.

    Markets don’t always behave rationally. Oil prices do not always reflect fundamentals like supply and demand. Over time, however, markets come into balance with fundamentals. Right now, oil prices are profoundly out of balance with fundamentals. Look for a correction.

    There is also a lot of excess capacity in the world that is caught up in political events with Iran and Libya as the key examples.

    All the best,

    Art