IEA-EIA Oil-Glut Bomb

Posted in The Petroleum Truth Report on September 14, 2016

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.


22 comments on this entry


  1. The is IEA reports is a fabrication meant to be used a tool to manipulate oil prices. The IEA has a footnote at the bottom of their web site that says:

    “1. Information or material of the IEA Technology Collaboration Programmes, or IEA TCPs (formally organised under the auspices of an Implementing Agreement), including information or material published on this website, does not necessarily represent the views or policies of the IEA Secretariat or of the IEA’s individual Member countries. The IEA does not make any representation or warranty (express or implied) in respect of such information (including as to its completeness, accuracy or non-infringement) and shall not be held liable for any use of, or reliance on, such information.”

    Any one that can not stand behind what they say is a liar going in…. just another manipulation scheme.

    Short oil, run prices down with lies, clear your short and go long, and then announce an OPEC meeting in which a deal is likely. This runs oil prices back up and you make billions of dollars. Jesus, such an easy plan for the manipulators!


  2. D,

    Although I share your skepticism about IEA, I am not disturbed by their disclaimer statement. World oil supply and demand is highly uncertain.

    I think that what IEA and EIA are saying about weak demand is consistent with the huge debt and slow growth of the global economy. I also believe that over-production is a symptom of the need for cash flow by companies and countries to service their massive debt loads.

    While I always question reports by IEA and EIA, the data that they provide is what I have to work with and it seems reasonable to me or I wouldn’t bother taking the time and trouble to analyze it and summarize it for those who care to read my posts.

    Thanks for your comments,

    Art


  3. Nat gas prices are rising. Oil looks to stagger along for a while longer. With exports and a ready price market in Europe, are we going to see oil and gas resume a more typical (pre-2006) price ratio closer to the BTU ratio? When NG was $4, oil should be ~$50 or less. But the past 10 years, the ratio has been closer to 25:1 and even near 50:1 at times.

    It seems oil demand is faltering but natural gas is replacing coal because it is cheap and Obama has kept his promise to kill the coal industry. So “cheap” gas is going to last how long? Seems it should rebound well before oil prices despite all the associated gas produced with oil.


  4. Terrel,

    I have stated that I believe natural gas prices will increase into the mid-$3 range in the relatively near term. It wouldn’t surprise me if prices move upward to $4 or $5 in the next few years but it would also not surprise me if they didn’t. It’s really a question of capital available to the E&P industry.

    The pre-shale gas oil-to-gas value ratio was about 10:1 to 12:1. If oil stays around $50 and gas moves above $4, we are back to that range again. At the same time, it is hard to imagine long-term oil prices at $50 simply because the oil industry can’t survive at those prices and true supply deficits will result with current under-investment. Having said that, I don’t think the world economy can support oil prices higher than about $60 unless something changes to allow more economic growth that we have experienced for the last 8 years.

    Perhaps $60 oil and $6 gas is the longer-term solution that allows the E&P industry to get by and provides energy value that is affordable in a low-growth economy.

    All the best,

    Art

    All the best,

    Art


  5. I just read an article that said that decommissioning deep water oil wells in the GOM will require 40B, and companies have not set aside anywhere near that amount. What would be the potential impact on oil production, bankruptcies and the oil balance? It would seem to me in this environment that this would cause a lot of shutdowns which could reduce US oil production. GOM also produces natural gas, but I’m not sure how its production compares to overall US.


  6. Richard,

    We never hear about a lot of important costs when companies and analysts are trying to sell us on something. Decommissioning costs are among these lost expenses but what about the plugging and abandonment costs for tens of thousands of tight oil and shale gas wells in the very near term?

    The offshore Gulf of Mexico accounts for approximately 4% of US natural gas. For comparison, Texas leads with 26% followed by Pennsylvania at 17%. Oklahoma accounts for 8%, Louisiana, 6% and New Mexico, 4%.

    All the best,

    Art


  7. Thanks a lot Art. I`m one of the peolpe who learns with your comments.

    Off the subjet
    Do you know someone who knows about elecric cars?
    For example I read abot the accidents with the batteries of new phone Samsung, some with injuries. Then I askwhatt happens electric cars batteries if they will are in great amount.
    Excuse my bad english
    Best Regards


  8. Carlos,

    I suggest that you begin reading Allen Brooks’ twice-monthly Musings From the Oil Patch. Allen covers the breadth of the energy umbrella including electric cars, offshore wind farms, etc. I also recommend Euan Mearns’ Energy Matters website. He and Roger Andrews cover wind, solar, nuclear and a variety of topics that will give you good information with an expert perspective.

    My take on electric cars is that they have not yet found much of a market but will slowly gain more acceptance. The main insight that I offer is that electricity requires a lot of fossil energy to produce the power and more to take care of the manufacture of electric cars, batteries, solar panels, and wind turbines not to mention the power distribution system and base-load backup generation to make up for renewable power intermittency. Electric-powered air transport is problematic.

    The main things to be aware of are time and energy density. Renewable energy and electric cars represent a tiny fraction of primary energy and transport markets, respectively. It will take decades before they have any significance at all in the larger scheme of things. People have an irrational faith in technology yet the coffee maker at my office doesn’t work half the time and most airplanes I fly on were build 35 years ago and don’t have electric power outlets. That is the time factor. We are not going to make rapid transitions to anything no matter how cheap the cost. People are slow to adopt especially when old, lower tech stuff still works fine and has years of life remaining. Renewable energy costs may some day beat fossil energy costs but can never bring back the age of super-abundant surplus energy made possible by the high energy density of petroleum.

    All the best,

    Art


  9. Art,

    Your comment about debt being the cause of the weak economy is spot on. Debt was incurred to compensate for higher oil prices which started in 2005. This pact with the devil culminated in QE1-QE3. And that problem cannot be solved quickly by lower oil prices. Before all that debt could theoretically be paid back in a growing economy (as a result of low oil prices) International Oil Companies would be bankrupt because they don’t have the low cost oil anymore to match those low oil prices.

    What happened is a permanent damage to the system. The supply gap after 2005 came from OPEC which did not deliver.

    The original peak oil idea was that oil prices would go sky high (i.e. $200 a barrel), followed by physical shortages. But on the way to that peak oil prices of just $100 played havoc with the financial system and the economy, bringing oil demand down from expected levels.


  10. Matt,

    You are correct but the debt bomb in the U.S. began in the early 1980s. The price bubble that came from the oil “shocks” of the 1970s and early 1980s deflated and brought energy prices back to affordable levels. Volcker raised interest rates and made U.S.Treasuries became the reserve asset of the world. That led to massive U.S. debt that would never be paid back. Low energy prices, public and and consumer debt fueled the economic revival of the 1980s and 1990s.

    Then, higher oil prices got in the way as you described by 2005. The solution, naturally, was more debt that coincided with the second oil-price bubble and zero interest rates after 2008. It was the “perfect storm”: super-high oil prices and free money. When that bubble collapsed in 2014, the whole world was now saddled with unmanageable debt.

    Now, we have peak oil for reasons I never imagined–low oil prices that cannot provide returns required by real oil companies. The result is under-investment for the last 2 years going on a likely 3rd in 2017. This will lead to supply erosion in a few years and the peak oil we all imagined will manifest with super-high oil prices that the weakened world economy will be unable to survive.

    It is not a pretty picture. The deniers believe that technological innovation will make unconventional oil profitable. I hope they are right but I see no way to get back to the surplus energy that conventional oil brought before 1970. Renewable energy is getting cheaper all the time but it will not deliver surplus energy at any cost because of low energy density and the time line to begin to supply a meaningful percentage of primary energy. Electric air transport remains problematic.

    Thanks for your comments,

    Art


  11. Art, I can understand how predicting oil and gas supply requires weekly data from all producers. But I don’t believe the supply bounces up and down in real life as fast and as often as reported by IEA, EIA, and API.

    The way I see things, the semi-monthly volatility in the oil and gas prices is the direct results of manipulation by world traders, hedges fund, and similar groups coupled together with the fabricated reports by the above three agencies.

    All three have secrecy clauses with their data providers. All three also have hold-harmless denials relieving them of responsibility. They are telling their audience to use the data at your own risk. The whole operations smells like one big circle jerk.

    I have great respect for you and believe reading your articles can teach me a lot that I don’t know.

    I would like to read more of your thoughts on how to get a handle on supply and demand without having to rely on agency reports that to me are obviously tainted.

    You say you have nothing else to work with but these reports. There must be some other formula like rig counts or drilling permits for example. Can you tell us how the old oil and gas executives sorted out supply and demand before the current data providers emerged?

    Can you also tell us how long it really takes for a US producer to get product to market once the decision is made to drill a 10,000-foot lateral? How many tier #1 pad optimized rigs are setting on the sidelines waiting to go to work? Is there a crew shortage? Can the current bunch of DUCs really produce much product? Why is drilling dying in the Gulf of Mexico? Do you think we will ever drill offshore along the Atlantic Coast?

    In my opinion, there are lots of investors that hungry for more basics.


  12. D,

    Highly variable production and consumption rates are symptomatic of a global economy fueled by debt and quite volatile pricing. Producing countries and companies must have cash flow to keep the lights on and service massive debt loads. That means producing oil at a loss when the capital is available and cutting back when it is not. Capital markets increasingly favor a smaller subset of producers that are seen as winners of at least survivors of the oil-price collapse.

    Similarly, most consumers don’t have much money after dealing with their debt. So, when prices fall low enough, they consume but when prices reach some relatively low threshold, they cut back.

    Think of the production and consumption as addicts frantically buying drugs when they have cash and risking death from withdrawal when they don’t. Try making sense out of that!

    I don’t claim to have everything figured out because no one does. A simple supply-demand model, however, clearly doesn’t work because it assumes an equilibrium system. It is not and that is why storage and comparative inventories are so critical. What you see as manipulating traders and hedge funds are part of the mechanism for the market to determine if there is adequate supply or not (and inventory is part of supply). The only way to know the value of anything is to put it on the market and see what people will pay.

    Rig counts, drilling permits, interest rates, currency exchange rates are all part of the picture and I discuss them in my posts. I follow crude oil inventories for the U.S., OECD, Cushing, Gulf Coast, as well as gasoline and other refined product inventories. I look at crude oil inputs to refineries, imports and exports of crude, and refined product supplied. The truth, however, is that oil and gas are an exceedingly complex system of delayed responses and feedback loops. That’s what makes it so fascinating.

    Your question about laterals and oil getting to market assumes that the oil provides an acceptable return and that there is demand. Both of those factors are doubtful at present and that is why inventories are so high. As long as everyone produces more than is needed for cash flow and to keep their stock prices up, this won’t change.

    There is a lot of relatively unimportant or at least peripheral noise put out by producers and analysts like DUCs, the seemingly ever-deceasing costs, rig efficiency, lateral length, IP rates, break-even prices, etc. Although these all have some basis in fact and reality, they are noise that is not central to the questions that thoughtful people like you have.

    In the end, it all comes down to economics. You questions about the Gulf of Mexico, Atlantic Ocean, as well as Arctic exploration, etc. are all questions of economics. I assure you that most reasonably sized companies are losing money at today’s oil and gas prices. Deep water drilling requires well head oil prices of about $80 per barrel to make commercial sense so the simple answer to your questions about those offshore areas is, Not at today’s prices.

    You are correct that investors are hungry for more basics. Hopefully, that is why you read my posts namely, because you do not have the experience or the time to go through all of the complex analyses that I and many other “experts” do.

    I offer this word of caution, however, in reading the opinions of experts. Ask if they have ever spent a day of their lives actually working in the oil and gas business. You will find that few, in fact, have. That doesn’t mean that they are not intelligent or that their views are not worthwhile. It is, however, a screening factor that will help you decide how to weigh their views.

    All the best,

    Art


  13. In my comment above I said that OPEC did not deliver in 2005. That caused the US recession and all the problems that followed.

    Have a look at Fig 1 in my latest post:

    11/9/2016
    Incremental crude production update August 2016
    http://crudeoilpeak.info/incremental-crude-production-update-august-2016


  14. I find it dificult to contribute to world oil isues going on right now. I think It is because I learn more of energy than petroleum now. I believe your work can be very relevant to me as I move on with my studies. Thank you Art Berman


  15. Art,

    I agree that electric car for personal use will be a tiny part of the car market and will not make a bit of difference in gas usage. Self driving car combined with electric cars maybe a game changer. Imagine getting out of your house and with a press of a few buttons in your cell phone, a car will come to pick you up to work, along with a few others at that moment that are going to the same direction. When you get off, the car goes to pick up someone else by itself. When the battery is down, it goes to the nearest charging station to charge up and go back on the road. This would reduce the overall driving since people are more willing to share a ride this way. Also electric cars can be employed on a much grander scale for going to/from work or other local trips since the cost is lower and the constraints of range and long charge time is not an impediment for this type of usage model

    Even as electricity needed to be generated using other fossil fuel, this would at least broaden the availability of types of fuels that could be used for transport (currently it is limited to oil).

    We have a rudimentary self driving car today, but this types of deployment maybe a decade or more away.


  16. John,

    Many have great faith in technologies that have not yet been invented much less tested and commercialized.

    I don’t share that faith because I still find that I am flying in 40-year old airplanes without electric outlets. That is not because the technology doesn’t exist but because we are not going to throw away functional equipment just because better and probably more expensive technology exists.

    That is especially true with cars. There are approximately 250 million cars in the U.S. whose average age is 11 years. Most of those cars are going to be around for another decade or two at least. Also, technology has a cost that we seldom include in our optimistic projections about a possible future.

    Acceptance and adoption is a big problem. I gave a talk this week and got a question about the impact of natural gas powered vehicles. That technology has been around for decades. I asked the audience how many owned a natural gas vehicle. Of course, the answer was zero. It costs a fair amount of money to convert to natural gas, you lose your trunk space, the range of the car is less and there are not secure sources of supply.

    I am all for electric cars and autonomous cars, as I am for all alternative forms of energy and transport. Still, viable alternatives to single-driver cars exist in the form of busses that a relatively small percentage of people use today.

    I say, let’s stop pinning our hopes on unrealistic adoption rates for future technologies and start focusing on what can be done today with existing and readily available alternatives. Once we have maximized those options then, let’s talk about the possible or probable.

    Thanks for your comments,

    Art


  17. Art
    I read this article in Yahoo finance , I share a little bit,

    WYALUSING, Pa. (AP) — Jan Brown pores over his royalty statement and wonders where all the money went.

    A few months ago, the nation’s second-largest natural gas producer siphoned $2,201 worth of gas from his 240-acre property — but paid him only $359 after taking deductions for transportation and processing.

    Brown, 59, who relies on the royalties as his sole source of income, says the deductions are outrageous and claims his lease forbids them. He feels cheated and duped.

    In Pennsylvania and other leading gas-producing states, a battle royal has developed over royalties, with landowners bitterly disputing the sums that some drillers have been taking from royalty checks already severely diminished by a collapse in prices.

    Chesapeake Energy Corp. alone is facing royalty lawsuits in Texas, Ohio, Louisiana, Oklahoma, Arkansas and Pennsylvania — including one filed by the Pennsylvania attorney general — and says it has received subpoenas from the U.S. Department of Justice, the U.S. Postal Service and states over its royalty practices.

    The deductions’ impact is especially acute in Pennsylvania, where gas extracted from the Marcellus Shale, the nation’s largest natural gas field, has been selling at a steeper discount than anywhere else in the country. Some landowners have seen their royalty checks dwindle to nothing at all, despite a 1979 state law that mandates a landowner royalty of at least 12.5 percent of the value of the gas. In rare cases, landowners have even gotten statements with negative balances.


  18. Carlos,

    I have little doubt that some companies are paying royalty owners less than they should. Still, be careful about the sources of information.

    What is the source of the $2,021 worth of value? Is that based on wellhead price or benchmark (Henry Hub) price because Pennsylvania local prices are well below the benchmark prices. Was a single price used or were daily fluctuations included? Is that before or after royalties and taxes?

    Most importantly, does that include or exclude processing costs that the royalty owner is generally expected to share? A pipeline will not accept gas that has not been processed to remove CO2 and other natural gas liquids.

    These sorts of claims are easy to make and probably have some element of truth to them but also probably over-state the reality of the situation.

    All the best,

    Art


  19. Hi Art,

    do you have an estimate of how much new oil production needs to be brought on line each year to offset the decline from mature fields? I have tried to find the necessary numbers but they are all based on a 2007 CERA study. It stated that around 59% of world oil fields were then in decline, and that average decline rates were around 6.1%. Applying those numbers to current world production of 95.65m (OPEC estimate for world oil supply in August) then it would seem that the annual loss from oil field depletion is around 3.44m barrels per annum. This estimate seems high. Is this calculation valid? Do you have a better estimate?

    Thanks


  20. Keith,

    I think you are close enough given the uncertainties involved in this calculation. There are probably more recent studies than 2007 and that was before the Financial Collapse and tight oil. Given all of that, I would use 5% but that is not a scientific estimate.

    Be careful not to apply the decline rate for oil to the daily production rate of liquids. Daily crude + lease condensate production for the world is about 80 mmbopd so 6% is about 5 mmbopd and 5% is about 4 mmbopd.

    All the best,

    Art


  21. Art the article is from AP, Your observations are true, and I show how difficult it is well informed. Most of the news we read are not innocent, besides most of the time they are written by people who know the issues superficially.
    I think there is too much the same. Power and ignorance, a dangerous duo.
    Thanks for reply, best regards


  22. Sorry to bother you again.

    I see this note on the MEGA fracking, is it credible or other marketing trial balloon?

    Long months with oil prices at rock bottom and high investments and aware wells unprofitable fracking at those prices have made producers fracking sharpen the wits to turn their competitive at lower prices wells and seems to have done I pulling sleeve-called Mega Fracking.

    The so-called hydraulic fracturing is a technique to extract oil that involves injecting water at high pressure to crack the rock to later inject sand with which to keep open the cracks and extract oil.

    Industry fracking has responded to lower oil prices with Mega Fracking, with the goal of creating fractures in rocks so you can extract more oil and faster by injecting amounts of sand that until a few years ago were difficult to imagine. In some cases this technique to create new is allowing 700% of fractures in the rock which were made in 2010.

    The result is you have in the following graph. The black line represents the number of oil wells in the Bakken region brown production per well. The result is that we now have much less active wells in 2014 in that area but those who are active are taking more than twice barrels of oil a day a couple of years. Consolidated the trend of Mega Fracking, the current rebound in oil prices could have very short legs.

    The graphics i are in the web

    http://www.gurusblog.com/archives/el-mega-fracking/03/10/2016/