The post COMPARATIVE INVENTORY & GAS STORAGE REPORT MARCH 16, 2023 (2023-11) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT MARCH 9, 2023 (2023-11) appeared first on Art Berman.

The fatal flaw in Alex Epstein’s Fossil Future is found in the book’s flyleaf.

 

 

 

 

 

 

 

 

 

 

 

 

 

For Epstein to be right, everyone else has to be wrong.

“In this book, I’m going to try to persuade you of something that may seem crazy to you…

“While we are almost universally told that more fossil fuel use will destroy the world, I am going to make the case that more fossil fuel use will actually make the world a far better place, a place where billions more people will have the opportunity to flourish…to experience higher environmental quality and less danger from climate.”

He encourages his readers to enlist in his fight for using more coal, oil and natural gas, and to reject “the moral case for eliminating fossil fuels.”

As a scientist and a proud 45-year veteran of the oil and gas industry, I disagree with him but I wanted to read his book in order to understand the logic and supporting evidence behind his positions.

I was completely unprepared for what I found.

In Fossil Future, Epstein develops a conspiracy theory to explain why the experts have gotten everything wrong.

There is a deep state organization that has created and spread fake news about fossil fuels and climate change. The purpose of the book is to open our eyes so we can rise up and stop the madness before current policies “have truly apocalyptic consequences.”

The Knowledge System Distorts Scientific Information

Epstein describes a shadow structure that he calls “our knowledge system.” It synthesizes and disseminates research about energy and climate change to policy makers and to the public.

“I am referring to the mainstream knowledge system: institutions and people that overwhelmingly influence the ideas and policies of today, including our ideas and policies regarding fossil fuels.”

The knowledge system consists of the U.N. Intergovernmental Panel on Climate Change (IPCC), the U.S. National Climate Assessment, the International Energy Agency (IEA), and the U.S. Energy Information Administration (EIA). These “synthesizing bodies” routinely manipulate and omit crucial information in order to conform to the knowledge system‘s guiding principle  “that fossil fuel use needs to be rapidly eliminated.”

This “moral case for the elimination of fossil fuels” is its mission, vision and sole purpose. Competing cases are rejected.

Once the knowledge system has organized, refined and condensed research information, it is passed along to disseminators for distribution to policy makers and to the public.

Disseminators include The New York Times, The Washington Post, and the BBC; the spokespeople for the IPCC and the governments that signed the Paris Climate Agreement; and the leaders of corporations like Black Rock and Apple that have articulated “net-zero” or “100 precent renewable” pledges.

By the time this information gets to the public, the research upon which it is based has been distorted beyond recognition.

The knowledge system probably began as a conceptual framework for Epstein. He may have been trying to understand how information that he considers wrong has gained public approval.

The knowledge system that he describes in Fossil Future, however, comes across as a living, breathing organism.  It has the character of a corporation with a charter, officers, and employees whose mission is to manipulate information about energy and climate in order to deceive the public.

The Knowledge System Chooses Designated Experts

The knowledge system has among its staff what Epstein calls “designated experts.”

These are individuals or institutions selected by the knowledge system be its public spokespeople and to represent the moral case for eliminating fossil fuels. They include the IPCC, Paul Ehrlich, John Holdren, James Hansen, Al Gore, Bill McKibben, Michael Mann and Amory Lovins.

After studying the writing and speeches by these experts, Epstein discovered that they systematically ignore the benefits of fossil fuels.

“As a deep believer in expert knowledge who found that the supposedly expert moral case for eliminating fossil fuels, as he understood it, was making the egregious moral error of calling for the elimination of fossil fuels while ignoring their massive, life-or-death benefits, I went directly to the source: the leading experts who make the moral case for eliminating fossil fuels.”

The experts either don’t understand or don’t care about the tremendous benefits that fossil fuels have over all other sources of energy.

“Shockingly, they exhibit no concern about the prospect of losing these benefits, including what would happen to the billions of people who currently lack cost-effective energy or the billions of people who would lose cost-effective energy if fossil fuels were rapidly eliminated without a miraculous alternative.”

Most experts oppose all cost-effective forms of energy including nuclear and hydroelectric power regardless of CO₂ emissions. That is because they do not meet the knowledge system‘s standard of “green” or “renewable.”

Epstein, therefore, rejects the credentials of these spokespeople because they don’t meet his definition of an expert.

“Observe that our leading designated experts on what to do about fossil fuels are almost exclusively people who are experts not on energy but rather on energy’s negative side-effects—so-called environmental experts…I don’t consider someone an environmental expert unless they acknowledge the massive environment-improving benefits of cost-effective energy, which our designated experts do not.”

That is not surprising since the starting point for Fossil Future is that experts can’t be trusted and have gotten everything wrong.

The Anti-Human Standard of Evaluation

The knowledge system deliberately misleads the public by promoting ideas and policies that are counter to the flourishing of human life.

Human flourishing is the only appropriate standard by which to determine energy and climate policy. Policies that do not promote human flourishing are by definition “anti-human.”

“Standards of evaluation can be pro-human (for example, I use the standard of “advancing human flourishing”) but also anti-human (for example, the elevation of a particular race or class at the expense of the rest of humanity).

Epstein argues that fossil fuels are the most affordable, reliable, versatile and scalable source of energy. They are the only hope for the billions of people in developing countries who are struggling and dying for lack of cost-effective fossil energy.

The evaluation standard used by our knowledge system favors expansion of green, renewable energy at the expense of fossil energy. It ignores that most of human material progress over the last 200 years is because of the productivity of machines that run on fossil fuels.

Solar and wind cannot possibly meet the requirements for current or future human flourishing. Human flourishing in the modern world requires fossil energy.

Today’s proposed policies to eliminate fossil fuel will make the world “an impoverished, dangerous and miserable place for most people.” That is anti-human.

Science’s Poor Track Record

Epstein explains that science experts have a track record of supporting anti-human policies. As proof, he cites the early 20th historical example of eugenics, the belief that intelligence has a genetic or racial component. He condemns this as an example of how science experts can’t be trusted.

“I have long been haunted by the fact that some of the worst ideas in history (such as slavery, racism and eugenics) were successfully spread as the consensus of ‘the experts’.”

What he doesn’t explain that eugenics was discredited and renounced in the 1930s by the entire scientific community. It took research to discover that early hypotheses linking race and intelligence were wrong.

Epstein lays out the poor track record of climate change predictions over the last 50 years. He cites this as proof that climate change is an exaggeration by science experts who can’t be trusted.

What he doesn’t explain or understand is that humans are chronically bad at all predictions. If human progress was predicated on accurate predictions, we would still live in caves.

Science is a work in progress. It is a very human enterprise. It moves forward, like people, by making predictions based on hypotheses, getting it wrong, recalibrating, and trying to do better the next time.

Epstein’s believes that the industrial progress of the last 200 years is because of machines powered by fossil fuels. Those machines were invented by scientists. He has faith that scientific technology will find solutions to climate change’s negative side effects in the future.

It is ironic that he disparages the same science community when it comes to climate change. He can’t have it both ways.

Fossil Future is A Straw Man

The principal arguments in Fossil Future are fallacies. They exist only in Epstein’s imagination. They are not real.

Fossil Future is a straw man.

A straw man is an argument that distorts an opposing position into an extreme version of itself and then argues against that extreme version.

“The straw man fallacy avoids the opponent’s actual argument and instead argues against an inaccurate caricature of it.”
—Lindsay Kramer

“Experts can’t be trusted” is a straw man. “The knowledge system” is a straw man. “Designated experts” is a straw man. “The moral case for eliminating fossil fuels” is a straw man.

Epstein is arguing with a scarecrow. He can make any argument he wants but the straw man can’t argue back. That makes his position seem infallible.

Experts can’t be trusted

Once he has launched the “experts can’t be trusted” straw man, he’s half way home. If the experts have gotten everything about the future of energy wrong, then Alex Epstein is here with the right position that we already live in the best of all possible worlds.

The problem is that none of us treat experts like that in our daily lives.

When was the last time you chose a surgeon, an attorney, an investment advisor or a tax accountant who wasn’t an expert? Have you hired amateurs lately to work with you in your business?

Epstein can’t make it past the flyleaf of Fossil Future if he doesn’t convince the reader that experts can’t be trusted.

Epstein is heavy on the benefits of fossil fuels but disturbingly light on their negative effects on the earth or human flourishing. He acts like these subjects are a new frontier that has yet to be explored.

“Let me be clear: we absolutely need to study and consider the negative side-effects attributed to fossil fuels.”

Spoiler alert. Exhaustive research on the relationship between fossil fuels and climate change is precisely why so many experts recommend a radical re-thinking of our energy use patterns.

The knowledge system does not exist. 

There is no organization or structure in between research and the public. Epstein observes,

“Whenever we hear about what the “experts” think, we need to keep in mind that most of us have no direct access to what most expert researchers in a field think.”

Seriously? Perhaps he hasn’t discovered the internet. We can access tens of thousands of free research papers on energy, climate change and public policy at any time.

I would like Alex Epstein to take me on a tour of the knowledge system‘s headquarters, introduce me to its executives, and show me the offices where research data is filtered and distorted.

There are no designated experts.

Since there is no knowledge system, there’s no one to hire experts to broadcast its distorted, anti-human moral case against fossil fuels.

Every field and industry has opinion leaders because of the depth of their knowledge and experience. Energy and climate change are not exceptions.

There is no moral case for the elimination of fossil fuels.

There are very few scientists or organizations that favor completely eliminating fossil fuels yet Epstein represents this as the norm. If eliminating fossil fuels is not the norm but is a minority position, then his entire argument falls apart.

There is no longer some anti-human monster trying to destroy human flourishing. There are just smart people who are trying to find ways to maintain human prosperity with cleaner energy.

Certainly there are experts and organizations that are alarmist. Those can be found in any group of humans. Failed predictions and even bad scholarship are sadly found in many areas of society, not only in climate science.

The exceptions, however, do not prove the rule.

If we strip away Epstein’s straw man arguments, what is left?

• A (completely unoriginal) thesis that fossil fuels are responsible for most of the material progress of modern society.
• A man who believes that humanity is going in the wrong direction toward a world of lower living standards.
• A man who cannot accept that the benefits of fossil fuel use may not outweigh the environmental damage that they have created.
• A man who is willing to bet against science on climate change but bet everything on the same science community to find  ways of accessing unlimited fossil fuels, and manage the negative effects of climate change.

The problem is that he cannot win a fact-based argument for his beliefs. so he has manufactured an imaginary universe populated by straw men.

If you accept the straw men, his positions look rational and appealing. Readers with limited knowledge of energy and climate change may not even recognize the straw men. Many are already conditioned by politics to accept deep state, fake news and untrustworthy expert memes.

Readers with greater knowledge of energy and climate change may disagree with his positions but simply not take Epstein seriously.

Epstein is narrowly focused. He doesn’t see the larger system needs that are the backdrop for his narrow focus on fossil fuels and climate change.

For example, he believes that there are no practical limits to fossil energy supply yet his own graphs show that reserves have flattened over the last decade or so.

The bigger picture is that more than half of the energy and ever used since 1800 was consumed during the last 30 years (Figure 2). If global GDP grows at 3% per year, we will need twice as much energy and materials in the next 30 years as we used in the last 10,000 years. That will will double again by 2080.

What will be left of the natural world if we are successful? What will happen to human flourishing if we are not?

Epstein thinks that human flourishing and nature are separate and disconnected entities. He doesn’t understand that there will not be any human flourishing in a degraded world environment and ecosystem.

“Without a biosphere in a good shape, there is no life on the planet. It’s very simple. That’s all you need to know.”
—Vaclav Smil

A recent study showed that the total world wildlife population has declined by 69% since 1970 (Figure 3). This is not about species extinction but about the populations in the natural world plummeting.

The reason for this shocking drop in animal population is loss of habitat to human expansion and the unsustainable use of our planet’s resources by humans.

This is not an anti-human standard. These are facts and numbers don’t lie.

Resource use including fossil fuels, climate change and a damaged biosphere are interlinked system problems that do not show up on Alex Epstein’s radar screed.

 

There are well-reasoned opinions on all sides of the climate change debate and disagreements about how much risk to attach to a warming climate but most accept what Epstein cannot: the correlation between fossil fuel use and increased CO₂ emissions is strong and will only get worse unless humans change consumption patterns.

Investor flight from fossil fuel companies has not abated and few commercial banks will them money. Most world governments are moving forward with laws, regulations and agreements to limit carbon emissions. Many more corporations than Black Rock and Apple have made net zero pledges. These things are happening in spite of Alex Epstein’s effort to become the world’s leading champion of fossil fuels.

In the long run, it doesn’t really matter whether Epstein is right or wrong because the earth will have the final vote.

The train that Epstein is trying to stop left the station a long time ago.

The post For Alex Epstein To Be Right, Everyone Else Has To Be Wrong appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT MARCH 2, 2023 (2023-2) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT FEBRUARY 23, 2023 (2023-8) appeared first on Art Berman.

Drilled uncompleted wells saved the shale patch during COVID. That’s the popular explanation.

The story is that so many wells were drilled in the boom years that many remained finished and only awaited fracking to produce. Producers relied heavily on these DUCs in the lean period during and immediately after COVID so they did not have to drill many new wells.

The problem with the story is that it’s mostly false. It’s a meme.

The True Part of the DUC Story

There is, of course, some truth to the story. Permian DUCs decreased from 3,601 in July 2020 to the 2015-2016 average of 1,131 by mid-2020 (Figure 1). That corresponded to a 70% drop in rig count (blue line in Figure 1). Production growth (gray fill in Figure 1) continued because DUCs were being completed to add production that was not coming from new drilling.

The Rest of the Story

It’s a good story but a closer look shows that it’s not a very good explanation. The first problem with the meme is that most DUCs are part of the normal operational cycle of drilling and completing multiple wells on a pad.

Figure 2 schematically shows a typical Permian basin pad-drilling configuration with 6 wells drilled from a single surface location. The average vertical depth is 8,000 to 11,000 feet, and the  lateral length is 10,000 to 15,000 feet for wells drilled in the last few years.

A typical well in the Permian shale plays takes 7 months from well spud (the beginning of well drilling) to first production (Figure 3). That is about the time required to drill 6 wells on a pad, log, set pipe, cement, frack, test, and connect the wells to sales lines.

That blows a huge hole in the DUC meme. It suggests that a backlog of DUCs is normal, not extraordinary. It’s just what happens when many wells are drilled from a pad. It simply doesn’t make operational sense to frack until all wells on the pad are drilled. It takes time.

There is a second problem with the DUC meme. The variation in the number of DUCs over time turns out to be a function of frack crew availability (frack spread) and not some systematic strategy to complete certain wells first and others later.

Figure 4 shows the incremental number of Permian DUCs since 2018 and the U.S. frack spread. The increase and subsequent decrease of Permian DUCs since 2018 is inversely proportional to the number of frack crews (frack spread data is only publicly available for the entire U.S. but I am confident that the trend for the Permian basin is notionally similar).

That means that the increase in DUCs was because of a reduction in frack spreads beginning in mid-2018, and not because of the extraordinary number of wells that were drilled.

In fact, both Permian frack spreads and rig counts began to fall in mid-2018—almost two years before the COVID economic closure—probably reflecting decreased outside capital available to producers  (Figure 5).

Data shows that the relationship between DUCs, the number of producing wells, and rig counts is much more complex than suggested by the mainstream DUC meme.

A third problem with the DUC meme is that it does not explain why Permian production continued to increase with fewer rigs, fewer frack spreads and fewer producing wells.

Production has climbed from 3.9 mmb/d in May 2020 to 5.2 mmb/d in January 2023 (Figure 6). This happened despite a decrease of 1,849 producing wells from April 2020 to April 2021.

Permian 30- and 90-day initial rates increased 8% in 2021 compared to 2020 (Figure 7). That partly explains the problem of increased Permian oil production. Much of that is due to increased lateral lengths from an average of about 9,000 feet in 2018 and 2019 to almost 11,000 feet today.

Initial production rates have fallen in 2022 but the number of producing wells has increased to more than offset that loss in well performance.

 

Memes Are Irresistibly Dangerous

Memes have been a fixture of the information landscape since long before the internet existed. A meme is a shortened version of the Greek word mimeme. It is a self-replicating unit of memory, the smallest piece of information that a person can easily remember, the lowest common denominator of intelligence.

“When you plant a fertile meme in my mind you literally parasitize my brain, turning it into a vehicle for the meme’s propagation in just the way that a virus may parasitize the genetic mechanism of a host cell.”
–Richard Dawkins, The Selfish Gene

A meme condenses a complex aspect of reality to a simplistic abstraction, something anyone can repeat in order to appear insightful and wise. No wonder people love them.

People want simple explanations for complex problems, and analysts with little oil industry background are eager to offer memes to fill their need. When enough analysts and media drones repeat the meme, it becomes conventional wisdom.

The DUC meme is a perfect example.

It is undeniably true that the number of DUCs has decreased since mid-2020. It is equally true that rig counts are much lower. Add the two together and the meme was born: companies are completing DUCs to make up for drilling fewer wells, and production continues growing as if nothing has happened. Case closed.

Unfortunately, it’s not that simple. It is a complex problem that has many related parts and feedback loops. It’s messy and requires data analysis and thought.

The analysis in this post goes a long way toward an explanation but leaves many questions either unanswered or with tentative answers. Welcome to the real world.

Human nature requires explanations and preferably simple ones. That is the appeal of memes. They are simultaneously irresistible and dangerous because their simplicity does not reflect reality but instead, some distortion that exists only in the human imagination.

If financial success were as simple as the memes that often guide investors, everyone would be rich.

The post Fact-Checking the DUC Meme: Mostly False appeared first on Art Berman.

The post COMPARATIVE INVENTORY & OIL STORAGE REPORT FEBRUARY 15, 2023 (2023-76) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & OIL STORAGE REPORT FEBRUARY 9, 2023 (2023-6) appeared first on Art Berman.

The post ART BERMAN NEWSLETTER: FEBRUARY 2023 (2023-2) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & OIL STORAGE REPORT FEBRUARY 1, 2023 (2023-5) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & OIL STORAGE REPORT JANUARY 25, 2023 (2023-4) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & OIL STORAGE REPORT JANUARY 19, 2023 (2023-3) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT JANUARY 12, 2023 (2023-2) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & OIL STORAGE REPORT JANUARY 5, 2023 (2023-1) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT DECEMBER 29, 2022 (2022-47) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT DECEMBER 22, 2022 (2022-47) appeared first on Art Berman.

Analysts have been wrong about oil prices for most of 2022 and continue to be wrong. Why?

Goldman Sachs provides a good case history.

In early June, the bank predicted $140 average Brent price between July and September. It was $100. In late August, when prices fell below $100, Goldman’s Jeff Currie said that Brent would return to $120. The September through October average was $92. In late November, the bank forecasted an average Brent-price of $100 for the fourth quarter of 2023. It has averaged $89 through December 19. In mid-December, Goldman’s latest forecast is for $90 for the first quarter of 2023 and an $98 average price for 2023.

My point is not to criticize Goldman Sachs but to try to understand why analysts have been consistently wrong.

The first problem is that supply and demand are central to their forecasts but supply-demand balance is a poor predictor of price. In fact, it has a statistically meaningless correlation to oil price (Figure 1). The R² correlation coefficient from 2015 to the present is 0.11. Leaving out the 2020 anomalies, R² gets worse and falls to 0.02.

I’m not saying that supply and demand don’t matter. The difficulty is that supply and demand are at best gross estimates. It is impossible to integrate every nation’s production, consumption and exports into a single framework. The data simply doesn’t exist. More importantly, supply and demand are transactional factors that largely exclude storage.

That’s right. Storage is not part of supply. Supply equals production, and demand equals consumption plus net imports minus storage withdrawals. That’s like saying that someone’s net worth only includes investments and savings when withdrawals are made from them.

Price formation in oil markets is all about supply and inventories are a big part of supply. Demand is of course important but markets cannot control demand. They can, however, use price as a lever to encourage drilling when there are concerns about under-supply, and to discourage drilling when over-supply dominates.

Oil price is not an input factor for either supply or demand. It’s relationship is implied or deduced.

The way that most analysts use supply and demand is unrealistic.  It assumes that markets are ordinarily in equilibrium with occasional periods of  dis-equilibrium. The truth is that, like all complex systems, markets are rarely in equilibrium except in the human imagination. Here’s what Goldman’s Jeff Currie said on December 15:

“Commodity prices perform an economic function. They have to rebalance supply and demand, bring them back into line, when they get out of line like they did in the end of 2021 and the early part of this year.”
–Jeff Currie, Goldman Sachs Head of Commodity Research

In other words, commodity markets are equilibrium systems that occasionally get out of whack.

Comparative inventory (C.I.), on the other hand,  assumes that oil is a mainly a disequilibrium system in which equilibrium is the exception rather than the rule. Crucially, oil price is a direct input factor. C.I. accounts for additions to and withdrawals from storage based on supply and demand, as well as for the reserve base that represents the storage equivalent of investments and savings.

Markets are always long or short (Figure 2). When C.I. is in deficit, markets are long and use higher price to encourage producers to drill more wells. When C.I. is in surplus, markets are short and use lower price to discourage drilling.

In a recent written communication, Mike Bodell who originated the comparative inventory method, stated,

“Simply, price formation requires a comprehensive, integrated view incorporating equilibrium and disequilibrium economic approaches.”
–J.M. Bodell

Not surprisingly, comparative inventory has a stronger correlation to oil price than supply-demand balance with an R² of 0.72 from 2015 through the present (Figure 3). It’s not perfect but its correlation coefficient is 6.5 times better than supply and demand.

Figure 3. Comparative inventory and oil price (quarterly data) have a much better correlation than supply and demand to price. Source: EIA & Labyrinth Consulting Services, Inc.

That brings me to the second reason that analysts have consistently gotten oil price forecasts wrong in 2022. Because they treat oil as an equilibrium system, they focus mainly on areas that are upsetting that equilibrium while treating most other factors as more-or-less static. Here is Jeff Currie again.

“Markets are re-balanced now today. Why? Because China is being locked down so demand came back down on top of supply and prices collapsed back down.

“We have not been investing in supply. Supply is stagnant.

“So I have to simply ask, What happens when China, the largest commodity consumer, the largest oil importer in the world, begins to rebound significantly in the first part of next year? It’s going to tighten all of these markets tremendously and put a lot of upward pressure on prices.”

I respect Jeff Currie and always pay attention to what he says but this is an incorrect view of market dynamics. In his model, the rest of the world is static and China is the only variable. According to his narrative, China’s zero-Covid policy put the market back into equilibrium by lowering demand; its rebound after lockdowns end will put the market into disequilibrium until higher prices “re-balance supply and demand.”

Felix Zulauf offers a very different perspective from Currie’s about what is happening in China. In a podcast with Wealthion’s Adam Taggart, he states that the risk is high for a Chinese “credit event” or financial collapse. There are at least $3 trillion in dollar-denominated loans to Chinese companies along with a major real-estate bust led by the downward spiral of developer Evergrande. This may put deflationary pressure on the global economy and may even result in a cascade of credit events outside of China.

In another podcast with Mauldin Economics’ Ed D’Agostino, Zulauf says that Chinese demand for commodities including oil may not rebound for perhaps a decade.

“I think that the lockdowns [in China] are sort of a camouflage to not show the world how structurally weak China has become.

“Because the Chinese economy has hit the same point as Japan in the early 1990s. It was exhausted after one of the biggest investment and credit booms of mankind…So, my guess is at least 10 years to get over this restructuring of the economy. It took Japan 20 years, and the excess is real small.

“So, I think, China you can forget as a locomotive for the world economy. And it has been the locomotive for the world economy in the last 15 years.”
–Felix Zulauf

Bloomberg’s David Fickling wrote an article on December 18 that seems to support some of Zulauf’s views about China’s economy. He points out that a smaller percentage of China’s oil consumption is used for transport than in other major economies. Although gasoline and jet fuel use have declined substantially because of 2022 lockdowns, total refined product consumption is only marginally lower (Figure 4).

He states that,

“In fact, the only factor that’s prevented China’s crude oil consumption from hitting a fresh record this year has been a precipitous collapse in asphalt production….

“That parallels the bust in the country’s real estate sector: bitumen is mainly used for surfacing the roads that connect new property developments to towns, as well building materials such as roofing.”
–David Fickling, Bloomberg

His concluding observation sounds very similar to Zulauf’s comment cited above.

“It’s a sign China’s long period as a driver of oil growth is near its end.”

For most of 2022, analyst forecasts were based largely on supply and demand. If there was an expected supply-demand deficit, that meant “tight markets” which, in turn indicated higher prices. As projected deficits got larger, so did the correlative oil price forecasts.

A simple look-back at the correlation of supply-demand balance and oil prices was either not done or was disregarded.

OPEC expects an a smaller supply-demand deficit in 2023 than in 2021 when the maximum Brent quarterly price was $79.59 and the maximum monthly price was $81.48 (Figure 5). Why would supply-demand considerations lead to substantially higher prices for 2023?

I expect low-to-mid $90 Brent prices in 2023 but if comparative inventory continues to increase as it has since early June, prices will continue to fall. In order to reach $90/barrel, C.I. must decrease about 40 mmb. That is feasible now that U.S. strategic petroleum releases are finished but first C.I.needs to stop increasing.

Throughout the second half of 2022, the analyst chorus proclaimed that inventories were at record lows when in fact, comparative inventory was increasing since June. U.S. total crude oil + refined product comparative inventory has increased 120 mmb since late June (Figure 6). Based on the dashed black yield curve, the current, implied market-clearing price for WTI is about $70. Why are people surprised that price has fallen from $120 to $76?

If we disregard Zulauf’s and Fickling’s views on structural problems with China’s economy, it is still unlikely that its demand for oil demand will recover quickly.

First of all, the changes to China’s zero-Covid policies are not a full reopening, and the most optimistic rebound forecast is for second quarter 2023. The latest models suggest more than 1 million deaths through 2023 with virus cases peaking around April 1. Nomura Holdings warns  “We continue to caution that the road to a full reopening may still be painful and bumpy.”

It is also worth noting that U.S. transport fuel consumption has not recovered from the effects of Covid after almost three years.

A lot of what passes for oil-market analysis is just a re-shuffling of popular memes to headline simplistic reasons for daily price movements. Once these stories are repeated enough, they become embedded in our thinking with more weight than they deserve.

Rather than disagree with oil prices or try to fit them into some pre-existing framework, I try to pause and ask, What does the market know?

The spectacular price collapse in November and December was because the market knew something that analysts did not. Oil supply was no longer tight and markets were risking Chinese demand differently. Instead of anticipating China’s re-opening as the best case for higher oil prices, the market was pricing in the more-likely case that China’s long period as a driver of oil growth is near its end.

 

 

The post Why Analysts Are Wrong About Oil Prices: What The Market Knows appeared first on Art Berman.

The post COMPARATIVE INVENTORY & OIL STORAGE REPORT DECEMBER 14, 2022 (2022-46) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT DECEMBER 8, 2022 (2022-45) appeared first on Art Berman.

WTI price was above $92 on November 4 and closed less than $75 on December 6. Brent closed below $80 for the first time since January 3.

What’s happening now in oil markets is probably a squeeze in which traders are unwinding their long positions, and it should pass. That said, it has all the signs of a price collapse. Whatever the explanations, structural changes are being reflected beyond the ordinary interplay between fundamentals and sentiment.

The 12-month spread between the WTI January and December 2023 contracts has fallen -$1.55 (-72%) since last Friday, December 2  to its lowest level since December 2020. WTI went from 3-month contango last Friday to 8-month contango on Tuesday, December 6 (Figure 1).

Cross-over of WTI 50-day, 100-day and 200-day exponential average curves corresponds to major, structural price declines in 2008, 2014, 2018 and 2020. Cross-over also occurred in December 2022 (Figure 2).

Analysts have been offering a daily chorus about “incredibly tight markets” for most of 2022.  For awhile, it seemed reasonable. Certainly the Russian invasion of Ukraine created extraordinary market dislocations that pushed energy prices to 10-year highs. But for 75% of the time since June 15, WTI price has been less than its 20-day average (Figure 3).

Only OPEC’s threat to cut production in late August (‘ABS Cut Comment’ in Figure 3) and subsequent delivery on that threat in early October (‘OPEC+ Cut Oct 5’ in Figure 3) lifted prices above that threshold before the descent that began on November 4.

Price has fallen -$18.36 (-20%) since November 4 and has decreased -$5.73 (-7%) from $79.98 to $74.25 since last Friday, December 2

Two weeks ago, Goldman Sachs forecasted an average Brent-price of $100 for the fourth quarter of 2023. At that time, Brent needed to average $110 for the rest of the year to reach $100. Since then, it’s averaged $84. As of December 2, Brent needed to average $118 for the rest of the year to reach an average of $100. That’s not going to happen.

Goldman’s call should be dismissed as misleading and irresponsible. In other words, they are pitching their book.

Things Are Not Returning to Normal

The 2020 global pandemic was a watershed event that completed a paradigm change for oil markets that began with the Financial Collapse of 2008.

 

LIKE WHAT YOU’RE READING? SUBSCRIBE TO THE NEWLETTER TO READ THE REST OF THE POST

The post Why Are Oil Prices Crashing? appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT DECEMBER 1, 2022 (2022-44) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT NOVEMBER 23, 2022 (2022-43) appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT NOVEMBER 17, 2022 (2022-42) appeared first on Art Berman.

Global diesel is in short supply.

Analysts are concerned about diesel because it is the hemoglobin of the global economy. The world’s mines, oil rigs, construction, ships, trains and trucks run on diesel.

Petroleum products are distilled from crude oil like whisky is distilled from fermented grain. For both petroleum and whiskey, a liquid is heated to create a vapor that is then condensed back into a liquid again. In the case of whiskey, distillation removes the heavier molecules that condense at the bottom of the still—the wash—and are later thrown away. Only the lightest fraction—the whiskey—that condenses at the top of the still is kept.

For petroleum, the whiskey is gasoline and a few lighter molecules. The wash is everything else including fuel oil, diesel, jet fuel and kerosene. These are not thrown away because in today’s market, they are worth more than gasoline.

Oil is a complex molecule that consists of a long chain of mostly carbon and hydrogen atoms (Figure 1).

Refineries upgrade crude oil into higher value gasoline and distillate products by breaking this long molecule down into smaller chains of carbon and hydrogen by a process called fractional distillation. The general molecular structures of propane, butane, gasoline and diesel are shown in Figure 2.

 

In a refinery, crude oil is heated under pressure in a furnace into a vapor and then fed into the bottom of a distillation tower (Figure 3).

Longer-chain molecules have higher boiling points than smaller molecules and condense back into liquids at the bottom of the distillation tower. The vapor cools as it rises through the column and different hydrocarbon molecules or fractions condense and run out of the tower at different levels.

The figure shows the main intermediate products that come out of a distillation tower with their average number of carbon atoms (C1 – C4, C5 – C8, etc. in the figure). These intermediates are then put through a series of blenders, treaters and catalytic processes that result in final products like gasoline, diesel and jet fuel.

 

Most U.S. refineries were built in the 1970s and were optimized for gasoline production because that was the most valuable cash product at the time. Diesel has since become more important but no large refineries have been added in the last 50 years. Increasing the volume of diesel means increasing the volume of all other refined products. The problem is that gasoline accounts for more than half of all petroleum product consumption today in the United States but diesel (distillate) accounts for only 24% (Figure 4).

To make matters worse, gasoline consumption has been weak. U.S. gasoline consumption has been below the 5-year average since June 2022 (Figure 5). Refining is a business. For as much as refiners would like to produce and sell more diesel, they can’t justify making more gasoline and other products that cannot sold at a profit.

In other parts of the world, refinery configurations are different and often designed to optimize diesel production. In Europe, for example, diesel yields are sometimes as high as 40% and gasoline yields as low as 15 or 20% (Figure 6).

Refineries that produce higher diesel yields use heavier crude oil as input. Not all oil is the same even though this is rarely considered or discussed by journalists or analysts. Some crude oils are heavy and others are light. That property of oil is expressed by its API gravity, a variant on specific gravity or density. Heavier oils have lower API gravities and lighter oils have higher API gravities. Lighter oils have limited middle distillates and heavy gasoil compounds that are need to make high-quality diesel.

Figure 7 shows a range of common crude oils used in U.S. refineries arranged by sulfur percent and API gravity. Most U.S. onshore oils including tight oils, and Brent oil are light and sweet (orange circles). Many Saudi Arabian and Iraqi oils, and Alaska North Slope oil are heavier and have higher sulfur content (blue circles). Many oils from Canada, Mexico, South America and West Africa are heavy with a range of sulfur content (black circles).

Most U.S. and Brent is fine for refining gasoline but must be blended with heavier grades to produce diesel. This is why the U.S. cannot be oil independent no matter how much oil it produces.

Figure 8 shows the intermediate product cuts for a range of oil types and API gravities. The red and green columns indicate distillate and heavy gas oil products that are suitable for diesel production, and the yellow and orange bars indicate gasoline components and naphtha products suitable for gasoline production. This clearly shows that an oil’s potential for diesel production is inversely and progressively proportional to its potential for gasoline production.

 

The last refinery built in the U.S. with significant capacity was in 1977 although smaller new plants and existing plant upgrades have occurred more recently. New complex refineries have operating lives of about 40 years can cost $15 to $20 billion. That’s a stretch for an industry that struggles with investor expectations of a limited future for fossil fuels.

Refiners understand that low diesel inventories are a relatively temporary problem triggered chiefly by Russia’s invasion of Ukraine. The European Union imported 39% of its diesel and gasoil from Russia in 2021 and its loss leaves a huge hole in worldwide supply.

There is little flexibility to modify the kind of crude oil input or distillate yield once the refinery is built. Suggestions by some people to re-design, to build new refineries, or to use new technologies to boost diesel output are not realistic.

Refining is a complex system that cannot be adjusted without unanticipated consequences. Simple solutions are incompatible with complex systems. The world is connected and interdependent for energy and refining in unavoidably fundamental ways. The lesson of the Ukraine War should be that energy cooperation is a far more important and strategic factor than territorial or ideological disputes.

 

The post ENERGY AWARE #4: THE DEVIL IS IN THE DIESEL appeared first on Art Berman.

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT OCTOBER 13, 2022 (2022-41) appeared first on Art Berman.