ART BERMAN NEWSLETTER: FEBRUARY 2023 (2023-2)

You are unauthorized to view this page.

Want access to this page? Select a plan here

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

A NEW OIL PARADIGM?

Oil prices are in a kind of sweet spot in which producers are making healthy profits while consumers no longer have to cope with the stress of the highest oil and refined product prices in many years. Yet analysts and journalists are obsessed with the possibility of much higher prices if demand from China rebounds.

Is that out of concern for the public and investors, or do they crave stoking anxiety about the next potential blow to the global economy? It reminds me of the Y2K phenomenon in which tens of billions were spent anticipating a potential end to civilization that never materialized.

I like the Saudi oil minister’s take on a demand rebound in China:

“I will believe it when I see it.”
–Abdulaziz bin Salman

WTI is currently in the mid-$70s and Brent is just above $80 but Goldman Sachs expects Brent to average $105 in the second half of 2023.

“Right now, we’re still balanced to a surplus because China has still yet to fully rebound. Capacity is likely to become a problem later this year when demand outstrips supply. Are we going to run out of spare production capacity? Potentially by 2024 you start to have a serious problem.”
Jeff Currie, Goldman Sachs

In other words, the present looks just right—if a bit boring—but get ready for some largely speculative event to change all of that.

Goldman has consistently missed its price forecasts to the low side by at least 20% since June 2022. My point is not to criticize but to try to understand why analysts have been consistently wrong.

One explanation is that Goldman and most analysts are using an outdated paradigm for oil-market dynamics and price formation.

The State of the Market

The relationship of the WTI 200-, 100- and 50-day moving average curves does not lie. When markets are bullish, the 200-day average is on the bottom followed by the 100-day with the 50-day average on the top. The order of those curves have been inverted since November 2022 (Figure 1). The 50-day average was about $6 below the 50-day average on Friday, February 3.

Figure 1. WTI 200-, 100- and 50-day average curves have been inverted since November 2022. Source: CME, EIA & Labyrinth Consulting Services, Inc.

There’s nothing scientific about those exponential average curves but they faithfully reflect bullish and bearish trends. It takes time to form a new trend in which the 50-day average changes positions with the 100-day, and for the 100-day to change positions with the 200-day average curve. Until that shift occurs, we should listen to what the market is telling us instead of what analysts tell us might happen.

For example, IEA Executive Director Fatih Birol said recently, “If demand goes up very strongly, if the Chinese economy rebounds, then there will be a need, in my view, for the OPEC+ countries to look at their policies.” Those are some pretty big “ifs.”

Back in the real world, U.S. comparative inventory (C.I.) has increased +140 mmb (+97%) since late May (Figure 2). C.I. is now approaching the 5-year average and the implied market clearing price is $70 for WTI at current inventory levels. SPR releases ended three weeks ago but C.I. has increased in each of those weeks. No ifs about any of that.

Figure 2. Total comparative inventory has increased +140 mmb (+97%) since late May. C.I. is approaching the 5-year average and the implied market clearing price is $70 for WTI at current inventory levels. Source: EIA & Labyrinth Consulting Services, Inc.

 

LIKE WHAT YOU’RE READING?

SUBSCRIBE TO SEE THE REST!

The post A NEW OIL PARADIGM? appeared first on Art Berman.

COMPARATIVE INVENTORY & GAS STORAGE REPORT FEBRUARY 2, 2023 (2023-5)

You are unauthorized to view this page.

Want access to this page? Select a plan here

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT FEBRUARY 2, 2023 (2023-5) appeared first on Art Berman.

COMPARATIVE INVENTORY & OIL STORAGE REPORT FEBRUARY 1, 2023 (2023-5)

You are unauthorized to view this page.

Want access to this page? Select a plan here

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

COMPARATIVE INVENTORY & GAS STORAGE REPORT JANUARY 26, 2023 (2023-4)

You are unauthorized to view this page.

Want access to this page? Select a plan here

The post COMPARATIVE INVENTORY & GAS STORAGE REPORT JANUARY 26, 2023 (2023-4) appeared first on Art Berman.

COMPARATIVE INVENTORY & OIL STORAGE REPORT JANUARY 25, 2023 (2023-4)

You are unauthorized to view this page.

Want access to this page? Select a plan here

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

COMPARATIVE INVENTORY & GAS STORAGE REPORT JANUARY 19, 2023 (2023-3)

You are unauthorized to view this page.

Want access to this page? Select a plan here

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

COMPARATIVE INVENTORY & OIL STORAGE REPORT JANUARY 19, 2023 (2023-3)

You are unauthorized to view this page.

Want access to this page? Select a plan here

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

They’re Not Making Oil Like They Used To: Stealth Peak Oil?

The good news is that U.S. oil production has recovered to pre-pandemic levels. The bad news is that only 60% of it is really oil.

U.S. oil production exceeded the 2020 pre-pandemic peak of 20.3 mmb/d in October and November of 2022 (Figure 1). Unfortunately, less than 60% of U.S. “oil” production is really oil. The rest is non-petroleum and comes from natural gas, corn & refinery gain.

Figure 1. Less than 60% of U.S. “oil” production is really oil. The rest is non-petroleum and comes from natural gas, plants & refinery gain. Source: EIA STEO & Labyrinth Consulting Services, Inc.

Natural gas liquids (NGLs) accounted for 6 mmb/d (30%) of U.S. “oil” production in 2022 (Figure 2). The NGL portion of total output increased 5% in 1H 2020 as crude production fell. Tight oil increased from 9% to 61% of crude + condensate from 2010 to 2022 and while it is oil, it has lower energy content than conventional oil.

Figure 2. Natural gas liquids accounted for 6 mmb/d (30%) of U.S. oil production in 2022. Source: EIA STEO & Labyrinth Consulting Services, Inc.

Natural Gas Liquids (NGLs)

NGLs do not come from crude oil but are produced from natural gas. They are gases in the subsurface but are separated as liquids at surface temperatures and pressures at natural gas processing plants (Figure 3). NGLs include ethane, propane, butane and pentane.

Ethane constitutes the largest share (~55%) of NGL production. It is used almost exclusively to produce ethylene, which is then turned into plastic bags, anti-freeze and detergent. Propane accounts for 31% of NGLs but only 3% of it is used as a transport fuel; its main use is home and water heating. Butane makes up another 16% of NGLs and its main uses are fuel for cigarette lighters and portable stoves, and as a propellant in aerosols.

 

Figure 3. What are natural gas liquids? Source: EIA, AFP tech and Labyrinth Consulting Services, Inc.

Refinery Gain

Refinery gain accounted for more than 1 mmb/d of U.S. oil production in 2022.

Gain occurs during refining because petroleum products coming out of a refinery are less dense than the crude oil going in. The volume of refined products is therefore greater than the volume of crude oil intakes. That volume difference is called refinery gain.

For example, the average density of crude oil is 846 kg/m3 (Figure 4).  Gasoline accounts for about 45% of each barrel of refined U.S. crude oil and its density is 744 kg/m3. That means that approximately 1.14 barrels of gasoline are produced from each barrel of oil. That is refinery gain.

 

Figure 4. What is refinery gain? Source: EIA & Labyrinth Consulting Services, Inc.

Fuel Ethanol

Fuel ethanol accounted for more than 1 mmb/d of  U.S. oil production in 2022. It is denatured alcohol made by fermenting the sugar in the starches of grains like corn (Figure 5). It is blended with gasoline to extend the use of that fuel.

Figure 5. What is fuel ethanol? Source: Resource Media and Labyrinth Consulting Services, Inc.

Tight Oil

Tight oil accounted for more than 7 mmb/d of U.S. oil production in 2022. Less than 5 mmb/d of conventional oil was produced in 2022. Unlike, natural gas liquids, refinery gain and fuel ethanol, tight oil is petroleum.

It has, however, a lower density and corresponding lower energy content than conventional oil. Permian tight oil, for example, has about 93% of the energy content (5.5 mmBtu/barrel) as the standard conventional oil required by U.S. refineries (5.9 mmBtu/barrel) (Figure 6).

Figure 6. Permian tight oil has 7% lower energy content than the average oil intake for U.S. refineries. Bakken & Eagle Ford tight oil have 4% lower energy content. Source: Enverus, EIA & Labyrinth Consulting Services, Inc.

Some may argue that 7% is not that much when it comes to a fuel as potent as oil but it is the difference between an “A” and a “B” in school. Put differently, imagine if world oil crude & condensate supply fell by 7%. That’s half of what Saudi Arabia produces. It’s five times more than Libya produces yet whenever its production falls because of civil conflict, world oil price is profoundly affected.

More importantly, tight oil does not contain the middle distillate compounds necessary for diesel production. Figure 6 shows the density (API and specific gravity) of the key conventional grades of oil, and for the Bakken, Permian and Eagle Ford tight oils. Tight oil is fine for making kerosene, jet fuel and gasoline. It cannot, however. be used for producing diesel without blending it with heavier oils, and diesel is the main cash product and workhorse of the modern global economy.

The U.S. can never be oil-independent because it will always need to import heavier oil to make diesel.

Figure 7. Many U.S. oils lack the heavy compounds needed to make diesel but are good for making kerosene, jet and gasoline. Source: Global Security, Enverus, EIA & Labyrinth Consulting Services, Inc.

 

Stealth Peak Oil

If any of this sounds strangely familiar, it is because it was anticipated 20 years ago by Peak Oil.

Peak Oil was a flawed concept because of its preoccupation with predicting a date for world oil production to peak. Many of its key precepts, however, were sound namely, that price would rise as oil quality decreased and decline rates increased. I have shown the pronounced decrease in oil quality at least in the United States.

Figure 8 shows that the total production base decline rate for the U.S. is about 37% per year. The data is for all wells drilled from 2000 through 2022 in the largest American producing regions that account for 88% of total crude oil and condensate output.

Figure 8. The red queen effect. The U.S. oil production base declines at 37% per year. Source: Enverus & Labyrinth Consulting Services, Inc. This is the aggregate decline for all wells, not just the rate for any given vintaged year shown in the figure.

The Peak Oil assumption that oil prices would increase chiefly because of the depletion of known reserves was simplistic. First of all, reserves are a moving target. The values published by BP or EIA are resources, not reserves. Reserves are a volume at a price, not a fixed quantity. When the price of oil increases, proved reserves increase, and vice versa.

Second, new reserves are always found despite the direst expectations to the contrary. The world has been 10 years away from producing all of its reserves since I began my career in the oil business 45 years ago.

More importantly, price formation is more complex than an inverse correlation with reserves especially in an increasingly financialized world. Markets care more about supply more than about reserves. Supply is current production plus inventories and spare capacity (the amount of production that can be converted into supply in about 90 days). The tens of billions of barrels of resources or potential reserves in plays unlikely to become supply in the near-term (like Orinoco tar sands) do not impress oil markets.

Supply urgency is what moves oil prices higher and markets have felt urgency for most of the last two decades. As Colin Campbell and Jean Laherrere insightfully observed 25 years ago,

“The world is not running out of oil—at least not yet. What our society does face, and soon, is the end of the abundant and cheap oil on which all industrial nations depend.”

WTI prices averaged $90 per barrel in 2022 dollars since 2003 (Figure 9). That is more than twice the average price during the preceding two decades. That $90 average includes the low-price periods from 2014 through 2017 (price collapse from shale output), and 2020 through mid-2021 (Covid) in which prices fell to their lowest levels in modern history.

Figure 9. WTI prices averaged $90 per barrel for two decades despite lower prices from 2015 through 2017 and during the Covid pandemic. Source: EIA, U.S. Dept. of Labor Statistics & Labyrinth Consulting Services, Inc.

Total world liquids production has recovered to 99% of 2018 average level but crude oil plus condensate has not and remains more than 4 mmb/d below late 2018 levels (Figure 10). The world is not running out of oil but investors and credit markets are unwilling to underwrite the drilling necessary to increase oil output.

Figure 10. Total world liquids production has recovered to 99% of 2018 average level but crude oil plus condensate remains more than 4 mmb/d below late 2018 levels. Source: EIA, Cansim, Enverus & Labyrinth Consulting Services, Inc

As David Fickling recently stated,

“Ultimately, it will be central banks that will read crude its last rites.”

The likelihood of a secular return to lower oil prices is as unlikely as is a technological breakthrough that results in enough new oil supply to modify pricing. That is because the “lower-for-longer” pricing after 2014 because of shale plays was a relatively insignificant anomaly in the larger price scheme in Figure 9.

The consequences of higher energy prices following Russia’s invasion of Ukraine have made the world more energy-aware. For some, they have increased the resolve to make a transition away from oil and other fossil fuels. At the same time, they have shown just how dependent we are on fossil energy, and will continue to be for decades to come.

Peak oil was a model that made reasonable if simplistic assumptions based on M. King Hubbert’s method of forecasting future oil production trends from proved reserves.

What I am describing is not a model. Oil quality has decreased, production decline rates have increased, and long-term secular prices are higher. Those are facts, not theory.

The sooner we stop expecting a miracle of technology or a quick transition to renewable energy, the better we will be able to cope with a more difficult energy future.

The post They’re Not Making Oil Like They Used To: Stealth Peak Oil? appeared first on Art Berman.

COMPARATIVE INVENTORY & GAS STORAGE REPORT JANUARY 12, 2023 (2023-2)

You are unauthorized to view this page.

Want access to this page? Select a plan here

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