COMPARATIVE INVENTORY & OIL STORAGE REPORT MAY 5, 2021 (2021-18)

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Net Zero, Gross Delusion

World government and business leaders sound committed to meaningful reduction of carbon emissions.

This is delusional.

The world economy is about 79% dependent on fossil energy. Substitution with non-fossil energy cannot happen fast enough to both reduce emissions and sustain present levels of economic activity and growth. Fossil fuels cannot be abandoned because production of non-fossil energy requires substantial carbon use.

For those who think that transport is the main use of internal combustion engines, think again. Of the 165 million internal combustion engines manufactured in 2020, less than half (78 million) were for automotive use. Agriculture, manufacturing, power generation, forestry and construction accounted for the other 53%.

For all of the net-zero emphasis on EVs, the transportation sector accounted for only 16% of global greenhouse gas emissions in 2020 (Figure 1). The industrial sector was the greatest source at 29% followed closely by agricultural at 28% and residential-commercial at 18%.

Figure 1. Transportation accounted for 16% of global greenhouse gas emissions in 2020. Source: World Resources Institute, Our World in Data & Labyrinth Consulting Services, Inc.

Energy is a system. A path to lower global emissions cannot be found by attacking one of two components without considering the state and inter-relationships of those to other parts of the system.

Energy consumption is unquestionably the largest source of greenhouse gas emissions and fossil fuels are the source of 79% of the world’s energy. It is, therefore, reasonable to assume that fossil energy is the biggest emission problem. It is, however, unreasonable to assume that this problem can be solved by substituting different energy types for fossil energy.

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ART BERMAN NEWSLETTER: MAY 2021 (2021-4)

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US Land Horizontal Rig Count Report, Week Ending April 30, 2021

Total U.S. land rig count…

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT APRIL 29, 2020 (2021-17)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT APRIL 28, 2021 (2021-17)

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US Land Horizontal Rig Count Report, Week Ending April 23, 2021

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT APRIL 23, 2020 (2021-16)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT APRIL 21, 2021 (2021-16)

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The Great Artificial Oil Price Rally

Happy days are here again! Goldman Sachs is calling for $80 Brent price and Citigroup expects record oil demand in the third quarter of 2021.

The problem with these forecasts is that the oil-price rally that began in April 2020 is mostly artificial.

When price fell from $60 in late February to -$38 two months later, it’s hard to call a return to $60 a rally. It’s really a just a recovery. Without OPEC+ withholding 8 to 10 mmb/d since April 2020, it’s doubtful the price recovery would have gotten much past $40 per barrel.

Record oil demand seems improbable since no one expects air travel to fully recover in 2021 and it accounted for about 8 mmb/d of global oil consumption in 2019.

Goldman Sach’s $80 forecast is plausible but it ignores that OPEC spare production capacity is at record levels. It reached 9.2 mmb/d in June 2020 and the March level of 8.5 mmb/d is about eleven times more than the 1.6 mmb/d the last time Brent price was at $80 in November 2018 (Figure 1).

Figure 1. $80 Brent ignores that OPEC spare capacity is at record high levels and is 11 times higher than when Brent was $81 in late 2018. Source: EIA & Labyrinth Consulting Services, Inc.

Spare capacity is part of supply and the 8.5 mmb/d of crude oil spare capacity in Figure 1 is equivalent to about 10.5 mmb/d of total liquids. World production of 93.5 mmb/d in March would have been almost 104 mmb/d without OPEC+ constraints.

Markets know this so why would they pay $80 per barrel with an 11% surplus in OPEC’s back pocket?

Citigroup’s view is that demand for oil will explode now that Covid vaccines are available. I expect demand to improve but not even the most optimistic forecasts suggest that it will return to pre-pandemic levels any time soon.

Figure 2 shows OPEC’s latest demand forecast and EIA’s supply projection. Oil demand was more than 100 mmb/d in the final two quarters of 2019. It is about 7 mmb/d lower now in the first quarter of 2021 at 93 mmb/d. OPEC expects it may rise to 97.75 mmb/d the third quarter. It’s forecast for 99.45 mmb/d in the fourth quarter represents an upward adjustment of +1.5 mmb/d since last month’s estimate. If true, that’s a big improvement but hardly the record demand levels proclaimed by Citigroup.

Figure 2. OPEC Q3 2021 oil demand expected to be 97.5 mmb/d & 99.5 mmb/d by year end. Demand was more than 100 mmb/d at the time of the Saudi refinery attack and Soleimani assassination in late 2019. Source: OPEC, EIA & Labyrinth Consulting Services, Inc.

The celebratory mood among analysts and journalists further ignores that current oil price is approximately the long-term average price. The CPI (consumer price index)-adjusted price of WTI since 1974 is $63.07 per barrel. The March average price was $62.33. The April 20 closing futures price was $62.44. There is nothing extraordinary about oil prices except that they have recovered from the lowest levels ever a year ago.

Figure 3. March $62.33 WTI price is slightly less than $63.07 47-year average CPI-adjusted price. Price only higher during artificial Iran sanction supply crisis April-October 2018 since 2014 oil-price collapse. Source: US Bureau of Standards, EIA & Labyrinth Consulting Services, Inc.

Oil prices cannot be whatever people think they should or might be. They are constrained by storage levels. OPEC knows this. That’s why it targets inventory because lower inventories will result in higher oil prices.

Higher price is not arbitrary or capricious. It is a cheerless and grudging matter for markets and done only when absolutely necessary.

The beauty of comparative inventory (C.I.) is that if you tell me a price that you think oil may be, I can tell you what has to happen to C.I. in order to get there. I have discussed the details of comparative inventory in a recent post.

Figure 4 shows the relationship between WTI spot price and total U.S. petroleum inventory from 2014 to the present. Two yield curves describe different periods of price formation. The red curve fit 2014 through 2016 data based on the market’s sense of supply urgency. The blue yield curve fits 2017 through present price-volume data. It reflects a lower sense of supply urgency than the 2014-2016 yield curve.

The March price-volume data point is shown in yellow with it’s $62.71 price annotated. If comparative inventory continues to decrease to the 8-year minimum, price will probably not exceed $70 per barrel. The data point by the blue arrow near the text “2018 Iran Sanction Excursion” represents the maximum price of $74.08 in July 2018.

The chart suggests that there is little possibility that WTI can get to $80 per barrel or more at any comparative inventory value unless markets re-value oil to 2014-2016 supply-urgency levels. Although that is possible, it seems unlikely given the amount of spare capacity that OPEC+ has withheld from the market since March 2020.

Figure 4. Two comparative inventory yield curves describe WTI market pricing since 2014. Excursions from the yield curve represent periods of price discovery. Source: EIA & Labyrinth Consulting Services, Inc.

Figure 5 shows the relationship between Brent spot price and OECD total commercial inventories. Unlike Figure 4, I have used EIA inventory forecasts and my own Brent price projections for 2021 beyond March. The March price-volume data point is shown in yellow with it’s $65.41 price annotated.

If comparative inventory continues to decrease, as EIA expects, the August 2021 price will probably not exceed $75 per barrel. That data point is shown in the second yellow dot near the text “Aug 2021”.

Figure 5. Maximum Brent price may reach ~$75 by late summer 2021 based on OECD comparative inventory yield curve. Source: EIA STEO & Labyrinth Consulting Services, Inc.

There are some who dismiss comparative inventory as a “backward-looking” method. I hope that I have shown its value in making reasonably calibrated estimates of future price based on previous and projected inventory data.

Another common objection to comparative inventory is that the yield curves are not a perfect mathematical regression. They are not supposed to be. Markets consist of people and human behavior does not follow regression algorithms. Price excursions—or deviations from the yield curve–are as important as price-volume data that falls on the curves.

Excursions represent periods of price discovery. When traders perceive that something has changed, they will bid prices up or down until no one is willing to take the other side of the trade. Then, price-volume data either reverts to the yield curve or moves to a new one if the discovery process reveals a new sense of supply urgency that warrants higher prices.

That does not, of course, mean that what I have shown is correct. It does suggest plausible scenarios that do not include the kind of unconstrained price forecasts often cited in the industry press.

The main point is that there is nothing extraordinary about current price or inventory trends. Relatively tight physical supply is entirely artificial because of OPEC+ production and export constraints. That said, none of the inventory projections presented discount those constraints at all.

The important yet simple take-away is that markets are not nearly as suggestible as most analysts and investors. Markets use price as a signal to producers to drill more or fewer wells in order to ensure future supply. Markets are not like the impatient person in an elevator who repeatedly presses a button for his desired floor thinking that somehow he will get there sooner. The elevator gets the signal the first time.

Similarly, once a price signal has been sent to producers, markets do not continue pressing the button with higher prices imagining that drillers are able to drill more wells faster as a result. Recently, 152 U.S. oil company executives told the Dallas Federal Reserve Bank that they were profitable at $52 per barrel WTI price. Why should markets pay more when there is already a healthy profit margin in the $60 to $65 range?

Markets are cheap and hate to over-pay. That is the basis of price formation.

 

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US Land Horizontal Rig Count Report, Week Ending April 16, 2021

Total U.S. land rig count…

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT APRIL 15, 2020 (2021-15)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT APRIL 14, 2021 (2021-15)

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US Land Horizontal Rig Count Report, Week Ending April 9, 2021

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT APRIL 8, 2020 (2021-14)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT APRIL 7, 2021 (2021-14)

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The Oil Price Rally Is Over

Last week I wrote that the the oil price rally was ending.  To some it may look like a price collapse now. I don’t think so but the price rally is clearly over for a while.

Today, WTI futures price fell -$2.80 (-5%) and Brent fell -$1.45 (-2%). The spreads, however, are revealing.

The WTI 12-month spread fell -$0.92 from $3.65 last Thursday to $2.73 today (Figure 1). That’s a -25% drop in one business day. The spread has fallen -$1.89 (-41%) since March 29. It has decreased -$3.77 since March 5. That’s the biggest drop since prices began to collapse in early 2020.

Figure 1. WTI 12-month spreads are collapsing. Spread fell -$0.92 (-25%) from $3.65 on April 1 to $2.73 on April 5. Spread has fallen -$1.89 (-41%) since March 29. Source: Quandl & Labyrinth Consulting Services, Inc.

Front-month price moved to its lowest level in more than 2 months at $58.65. The forward curve is in prompt-month contango and its term structure is flatter than it’s been for weeks (Figure 2). At the same time, it doesn’t look like a collapse in this context, at least not yet.

Figure 2. WTI 12-month spread fell -$0.92 (-12%) from $3.65 to $2.73 on April 5. 6-month spread decreased -$0.37 (-29%) from $1.28 to $0.91. Front-month price decreased -$2.80 (-5%) from $61.45 to $58.65. Source: CME & Labyrinth Consulting Services, Inc.

Brent 12-month spreads reversed today from the lowest level since January last week. The spread increased +$0.48 from $2.42 to $2.90 on Monday, April 5 (Figure 3). That looks less dire than WTI spreads..

Figure 3. Brent 12-month spread reversed from lowest level since January week ending April 1 and increased +$0.48 (+20%) from $2.42 to $2.90 from April 1 to Monday April 5. Source: Quandl & Labyrinth Consulting Services, Inc.

Both WTI and Brent prices are about +$0.60 to $0.70 higher in early trading as I write at 10:00 p.m. Houston time. I don’t think prices are collapsing but it is improbable that they will regain March highs any time soon.

The rally was over a few weeks ago but until late last week, there was hope it might resume its upward momentum. That seems unlikely for now. I doubt that the Saudi oil minister is feeling too good about OPEC+’s  decision last week to increase output and his decision to raise Asian prices.

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US Land Horizontal Rig Count Report, Week Ending April 2, 2021

Total U.S. land rig count…

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT APRIL 2, 2020 (2021-13)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT APRIL 1, 2021 (2021-13)

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Super-Cycle Silliness: Why Oil Prices Will Not Increase Much Further

Monthly oil prices have nearly quadrupled since April 2020 and that has some analysts talking about an oil super-cycle. That seems somewhere between premature and stupid at least for oil.

We’re near the end of a price increase that began at less than zero back to the where prices were before the pandemic. That’s a recovery not a rally.

Commodity super-cycles are caused by transformational periods of economic development and massive capital investment. They are characterized by demand growth and high commodity prices that may last for years.

Figure 1 shows world crude oil and condensate supply and price from 2000 to the present.

Figure 1. Flat world production led to 2003-2014 oil super-cycle. Tight oil added 10 mmb/d of supply and ended the super-cycle. 2020-21 lower output not a supply problem but artificial from OPEC cuts & less drilling. Source: EIA, Cansim, Enverus & Labyrinth Consulting Services, Inc

An oil super-cycle began in about 2003 and ended in 2014. It was caused by a plateau in oil supply in the face of rapid economic growth in developing countries like China, Russia, Brazil and India.

High oil prices resulted in development of tight oil, and renewed exploitation of oil sands and deep-water objectives. An additional 10 mmb/d of supply were added after 2010. Prices collapsed from over-supply in 2014 ending the super-cycle.

The present oil supply situation could not be more different than in the early 2000s. World output today is low because there is too much supply for existing demand. It is low because OPEC+ is withholding 8 to 10 mmb/d. It is artificial. Global debt and unemployment have never been higher. This is not the stuff of super-cycles.

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ART BERMAN NEWSLETTER: APRIL 2021 (2021-3)

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US Land Horizontal Rig Count Report, Week Ending March 26, 2021

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT NOVEMBER 6, 2020 (2020-23)

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US Land Horizontal Rig Count Report, Week Ending November 6, 2020

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COMPARATIVE INVENTORY & OIL STORAGE REPORT NOVEMBER 4, 2020 (2020-28)

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ART BERMAN NEWSLETTER: OCTOBER 2020 (2020-9)

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US Land Horizontal Rig Count Report, Week Ending October 30, 2020

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT OCTOBER 30, 2020 (2020-22)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT OCTOBER 28, 2020 (2020-27)

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US Land Horizontal Rig Count Report, Week Ending October 23, 2020

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT OCTOBER 23, 2020 (2020-21)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT OCTOBER 22, 2020 (2020-26)

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US Land Horizontal Rig Count Report, Week Ending October 16, 2020

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT OCTOBER 17, 2020 (2020-20)

PLEASE NOTE: I will be on vacation next week October 19-25 and will post only an abbreviated report summarizing highlights and showing a few key charts. Thanks for your understanding. 

Art

Highlights of this week’s report:

  • Spot natural gas prices increased sharply this week and recovered almost to late August levels.
  • Gas storage remains at record levels levels for early October.
  • Comparative inventory decreased -26 bcf. It was the largest decrease since February.
  • Temperatures are expected to be warmer than normal next week.

Comparative Inventory and Price Movements

Gas markets turned bullish this week as U.S. natural gas spot price rose +1.04 from $1.49 on October 8 to $2.53 on October 15 (Figure 1). Prices have now returned almost to late August levels.

Figure 1. U.S. natural gas spot price has increased almost to late August levels.
Price rose +$0.51 from $2.02 to $2.53.
Spot has increased +$1.20 (+90%) since August 24.
Source: EIA and Labyrinth Consulting Services, Inc.

Futures prices are rallying because they are based on November expectations whereas the spot market is based on the current cash transaction price. The futures contract for January closed at $3.39 on October 16.

Futures and spot general trends should be aligned but they are not.

Figure 2. Natural gas futures prices have increased +$0.93 (+51%) since September 22.
Price fell from -$0.11 from Monday’s high of $2.88 to $2.77 week ending October 16.
12-month spreads widened $0.18 (360%) from -$0.05 to -$0.23.
Source: EIA and Labyrinth Consulting Services, Inc.

U.S. natural gas comparative inventory fell -26 bcf to 309 bcf for the week ending October 9 (Figure 3). This was the second week in-a-row that C.I. has fallen.

This week’s C.I. vs Henry Hub spot price is shown by the yellow circle in Figure 3 . Last week’s data point is shown in light blue. 

C.I. vs Henry Hub price plots below the previous red yield curve for the week ending October 9. It is -$0.24 under-priced at $1.46 on the red yield curve and -$0.46 under-priced on the green yield curve.

Figure 3. C.I. vs Henry Hub price plots below the previous red yield curve week ending October 9.
It is -$0.24 under-priced at $1.46 on the red yield curve
and -$0.46 under-priced on the green yield curve.
Source: EIA and Labyrinth Consulting Services, Inc.

U.S. natural gas storage remains higher than 2016 record-high levels for the ninth week in-a-row (Figure 4). Storage decreased to +309 bcf more than 5-year average and moved down to +358 bcf more than a year ago for the week ending October 9. The addition of +46 bcf was -26 bcf smaller-than-average for this date.

Figure 4. U.S. natural gas storage fell to +309 bcf more than 5-year average
and moved down to 358 bcf more than a year ago week ending October 9.
Addition of 46 bcf was -26 bcf smaller-than-average for this date.
Source: EIA and Labyrinth Consulting Services, Inc.

Natural gas comparative inventory is at the lowest level since the week ending June 12 (figure 5).

Figure 5. Natural gas comparative inventory fell for second week in-a-row.
C.I. decreased -26 bcf to +3096 bcf week ending October 9.
Lowest level since mid-June.
Source: EIA and Labyrinth Consulting Services, Inc.

U.S. temperatures are expected to be twice as warm as last year and 69% warmer than the norm for the week ending October 16 (Figure 6). The week ending October 9 was 13% cooler than last year but 18% warmer than the norm.

Figure 6. U.S. temperatures are expected to be twice as warm as last year
and 69% warmer than the norm week ending October 16.
Week ending October 9 was 13% cooler than last year but 18% warmer than the norm.
Source: EIA and Labyrinth Consulting Services, Inc.

Supply and Demand

Natural gas consumption fell +2.2 bcf/d to 62.1 bcf/d for the week ending October 9 (Figure 7). Residential-commercial use fell -2.2 bcf/d after surging +4.4 bcf/d last week. LNG pipeline receipts fell -0.7 bcf/d after increasing +0.8 bcf/d last week.

Figure 7. Natural gas consumption fell +2.2 bcf/d to 62.1 bcf/d week ending October 9.
Residential-commercial use fell -2.2 bcf/d after surging +4.4 bcf/d last week.
LNG pipeline receipts fell -0.7 bcf/d after increasing +0.8 bcf/d last week.
Source: EIA and Labyrinth Consulting Services, Inc.

Supply decreased -1.6 bcf/d and demand decreased -2.7 bcf/d as the surge in residential-commercial space heating last week subsided with more normal weather in the northern part of the country (Figure 8). Dry gas production fell -1.2 bcf/d from 87.1 bcf/d last week to 85.9 bcf/d for the week ending October 9. Some of this was because U.S. oil production fell from 11 to 10.5 mmb/d with lower associated gas output. Canada gas imports fell -0.3 bcf/d to 4 bcf/d.

The supply-demand balance was +8.7 bcf/d for the week ending October 9. That was -3.2 bcf/d less than the +11.9 bcf/d 5-year average surplus for October. This lower-than-normal supply surplus may be part of the reason for higher prices.

Figure 8. The supply-demand balance was +8.7 bcf/d week ending October 9.
That was -3.2 bcf/d less than the +11.9 bcf/d 5-year average surplus for October.
Source: EIA and Labyrinth Consulting Services, Inc.

Discussion

Nothing about natural gas markets is normal right now. They have been on a roller coaster of price discovery excursions since April. Mid-October prices are higher than peak levels last winter. Spot and futures prices are largely disconnected.

Futures prices fell from a November 2019 high of $2.86 to $1.55 by early April (Figure 9). That was normal. The three price discovery excursions that followed during the Spring and Summer fill season were not normal. These departures can be explained but their magnitude cannot.

Figure 9. Natural gas markets on a roller coaster of price discovery excursions since April.
October prices were higher than peak levels last winter.
Source: Quandl and Labyrinth Consulting Services, Inc.

I can find no measure of supply, demand or storage that accounts for observed price fluctuations. Storage is at record levels. That should mean lower not higher prices. The supply-demand balance has been lower than the five-year average in October but does not signal supply urgency. Comparative inventory has fallen for two weeks but is far above levels that should indicate higher prices.

The only explanation is uncertainty. The pandemic and economic depression have put everything into question. Oil and gas production cannot be maintained with rig counts at record low levels. Companies have limited capital and cannot drill more wells from cash flow. Investors have sent the strongest signals possible that they want to see fiscal discipline before returning with cash. Fossil energy has never been more out-of-favor in world opinion.

Yet the economy cannot function much less grow without energy. The result is a heightened sensitivity to otherwise ordinary events. I see little chance that this will change until we get through winter heating season. If supply proves adequate, as I believe it will, price discovery will end or modulate. If not, markets will continue to use price leverage to increase supply.

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COMPARATIVE INVENTORY & OIL STORAGE REPORT OCTOBER 16, 2020 (2020-25)

PLEASE NOTE: I will be on vacation next week October 19-25 and will post only an abbreviated report summarizing highlights and showing a few key charts. Thanks for your understanding.

Art

Highlights of this week’s storage report:

  • Comparative inventory fell for the twelfth consecutive week. It was the largest decrease since February 2019.
  • Comparative inventory fell for all products except residual. Distillate C.I. decreased the most in three years.
  • Crude oil storage decreased -3.8 mmb.
  • WTI futures are at about $3.00 under-priced at $40.89.
  • Weekly consumption rose +1.1 mmb and the 4-week average increased +0.6 mmb.
  • An SPR withdrawal of 1.8 mmb and unaccounted oil of -5.5 mmb were factors in the crude oil supply balance.

Comparative Inventory

Comparative inventory decreased -3.96 mmb this week. C.I. has decreased for twelve consecutive weeks but his week’s decline about twice as large as the -7.1 mmb average for those three months. 

A crude oil withdrawal of -3.82 mmb when the average is a +2.47 mmb addition led to a -6.29 mmb decrease in crude C.I. (Figure 1). Similarly, gasoline stocks fell -1.63 mmb when a -0.76 withdrawal is normal, resulting in a -0.86 mmb decrease in C.I. A much larger-than-average distillate withdrawal led to a -5.87 mmb change in C.I. This was the largest decrease in distillate C.I. since August 2017 and potentially significant if it proves to be more than a one-off event.

Figure 1. Comparative inventory decreased -15.63 mmb week ending October 9.
Crude oil and all key refined products C.I. decreased except residual.
Source: EIA and Labyrinth Consulting Services, Inc.

Other than crude oil and distillate, the largest C.I. change this week was propane-propylene which fell -2.38 mmb probably because of cold weather in the northern half of the country (Figure 2). Kerosene-jet stocks fell -1.47 mmb for a C.I. change of -0.5 mmb. Residual C.I. increased +0.6 mmb on a larger-than-average addition of 0.66 mmb.

Figure 2. Comparative inventory decreased -15.63 mmb week ending October 9.
Crude oil and all key refined products C.I. decreased except residual.
Source: EIA and Labyrinth Consulting Services, Inc.

Comparative inventory has fallen -86 mmb since the week ending July 17 (Figure 3). The C.I. decrease was about twice as large as the average of -7.1 mmb over the last 3 months. Based on the average twelve-week decline rate, it will take 9 weeks for C.I. to reach the 5-year average.

Figure 3. Comparative Inventory has fallen -86 mmb (-58%) since July 17
-16 mmb decrease in C.I. week ending October 9 twice as large as average
9 weeks for C.I. to reach 5-year average at -7.1 mmb/week mean decline rate.
Source: EIA and Labyrinth Consulting Services, Inc.

Comparative inventory vs WTI price data continues to move toward the five-year average but has moved below the green yield curve over the last five weeks (Figure 4). This reflects more pessimistic market sentiment as Libya’s output is increasing and Norway’s oil worker strike has been resolved.

The weekly average WTI price of $40.19 was about $4 under-priced based on the yield curve. The current WTI futures price on October 7 of $40.89 is about $3.00 under-priced.

Figure 4. U.S. comparative inventory fell -15.63 mmb to 63 mmb more than 5-year average
Weekly average WTI of $40.19 is ~$4 under-priced
based on the green C.I. vs price yield curve.
Source: EIA and Labyrinth Consulting Services, Inc.

Supply and Demand

Table 1 provides a convenient snapshot of the major factors that affected this week’s storage report. Weekly consumption increased +1,130 kb/d and 4-week average consumption rose +614 kb/d. Refinery intakes fell -276 kb/d and field production fell -500 kb/d to 10.5 mmb/d.

Table 1. Petroleum status vital statistics.
Source: EIA and Labyrinth Consulting Services, Inc.

There was a +1,159 kb release from the strategic petroleum reserve (SPR) and a -5,495 kb volume of unaccounted-for oil. Crude oil imports were -446 kb/d lower at 5.3 mmb/d and crude exports were -524 kb/d lower at 3.4 mmb/d. Net refined product exports increased +270 kb/d.

U.S. refined product consumption rose +614 kb/d from 17.8 to 18.4 mmb/d for the week ending October 9 (Figure 5). Recovery increased +11.5% from 58.5% to 70% of the 5-year average. That is the highest level since the consumption and economic collapse earlier this year.

Figure 5. U.S. refined product consumption rose +614 kb/d from 17.8 to 18.4 mmb/d
week ending October 9
Recovery increased +11.5% from 58.5% to 70% of the 5-year average.
Source: EIA and Labyrinth Consulting Services, Inc.

The consumption increase this week was headlined by diesel which jumped from 17% to 87% recovery in a week (Figure 6). I have to be skeptical that this is a data problem or one-week anomaly. If additional data proves it to be durable in coming weeks, it would be quite significant indicating real strength in the pace of the U.S. economy. Gasoline’s recovery was unchanged from last week at 84%.

Figure 6. U.S. refined product consumption has recovered to 70% of the 5-year average
Diesel has recovered to 87% and gasoline to 84%
Kerosene jet is at 29% of its 5-year average.
Source: EIA and Labyrinth Consulting Services, Inc.

U.S. refinery intakes fell from last week’s highest level since week ending August 28 (figure 7). This week, intakes decreased -276 kb/d to 13.6 mmb/d. This is -1.9 mmb/d less than a year ago and -2.0 mmb/d less than the 5-year average.

Figure 7. U.S. refinery intakes fell from highest level since week ending August 28.
Intakes decreased -276 kb/d to 13.6 mmb/d week ending October 9.
-1.9 mmb/d less than a year ago and -2.0 mmb/d less than the 5-year average.
Source: EIA and Labyrinth Consulting Services, Inc.

Discussion

The most remarkable aspect of this week’s storage report is that oil prices did not increase. Everything about the report was strongly positive except lower refinery intakes. Consumption recovery reached the highest level so far. Distillate/diesel demand and inventories have been a major drag on oil markets and this week’s distillate withdrawal was the largest in three years. Across-the-board larger-than-average withdrawals of crude and most other products should have moved price higher at least for a day or so. Instead, futures fell -$0.08.

New Covid-19 surges in Europe, the apparent resolution of Libya’s production hiatus and the settlement Norway’s oil-field workers strike all weighed on market sentiment. Reports by OPEC and IEA this week emphasized the magnitude of over-supply and fueled growing sentiment that oil is not part of the global energy future. These seemed to underscore the gloomy views from BP’s Energy Outlook published last month.

That is the mainstream explanation.

Comparative inventory, however, anticipated this price trajectory. Figure 8 is from the April edition of The Comparative Inventory and Oil Storage Report. Even with limited data, the anticipated green yield curve was largely the same as it is today as shown above in Figure 4.

Figure 8. Comparative inventory chart from April 2020.
Source: EIA and Labyrinth Consulting Services, Inc.

A flat yield curve means that markets have little sense of supply urgency. Even large changes in C.I. do not result in much change in price. The downward price departure from the yield curve in Figure 4 probably reflects sentiment and price discovery. WTI should return to the low-to-mid $40 range once the market changes its present negative perspective.

Some analysts see more downside than upside price risk. Comparative inventory suggests the opposite.

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Oil and The Changing World Order

U.S. oil inventories have fallen every week for two months yet WTI has averaged less than $40 per barrel since the end of August. That is because oil has been re-priced and markets are unwilling to pay more for it.

Those who expect a return to 2019 price levels acknowledge that the oil-demand recovery has stalled. They believe that this is because of Covid-19 and that things will be return to normal once there is a vaccine.

Perspective

“I don’t think the severity of this downturn has been well understood yet.”

Sophia Koropeckyj, Moody’s Analytics

What is happening to oil markets and to the global economy is not because of a virus. The virus greatly accelerated what was already happening. Things won’t go back to normal when the virus ends. I wrote that a month ago and nothing has happened since then to change my mind.

The world is in a debt cycle that began fifty years ago. World orders change when debt cycles approach their end. Ray Dalio has studied how and why world orders have changed over the last 1500 years. These are the requisites that changing world orders have in common:

  • High levels of indebtedness.
  • Low interest rates that limit the ability of central banks to stimulate the economy.
  • Large wealth gaps and political divisions that lead to social an political conflicts.
  • A rising world power that challenges the over-extended leading power.

These criteria have clear relevance to the present world order as China challenges U.S. hegemony. Discord created by debt, interest rates and income inequality have been aggravated by the Covid-19 pandemic but will not be resolved when the virus is controlled.

What Recovery?

The U.S. oil consumption recovery is getting worse, not better. U.S. oil consumption recovered to 65% of normal in July and has since decreased to 61% (Figure 1).

Figure 1. U.S. oil consumption recovery is getting worse, not better.
Recovery fell from 65% (18.32 mmb/d) in July to 58% (17.81 mmb/d) in September.
Source: EIA and Labyrinth Consulting Services, Inc.

Some analysts report a much more optimistic recovery of about 90%.

Figure 2 shows EIA consumption data for September. September consumption of 17,815 mmb is 90% of the 5-year average of 19,834 but that is not a measure of recovery. Recovery must be measured between two datums.

Recovery is determined by comparing the current level (90%) with the 2020 minimum (74%) and the 5-year average (100%). The current level is 16% of the 26% gap between the April minimum and the average. Sixteen divided by twenty-six is sixty-two so recovery is 62%, not 90% (These are rounded to an even percent so the true recovery is as shown in Figure 1 as 61%).

Figure 2. U.S. oil consumption calculation method.
Source: Labyrinth Consulting Services, Inc.

The consumption recovery continues to be dominated by gasoline which was 8.74 mmb/d in September or 84% between its minimum and five-year average (Figure 3). That is not surprising since gasoline accounts for about 45% of refined products produced from every barrel of oil. Jet fuel’s recovery is only 30% and diesel’s is only 17%.

Figure 3. U.S. refined product consumption recovered to 61% of the 5-year average in September.
Gasoline has recovered to 84%, jet fuel to 30% and diesel to 17%.
Source: EIA and Labyrinth Consulting Services, Inc.

Gasoline use is important but driving around to see friends and make small purchases contributes little to economic activity.

Diesel is the barometer of the economy and its use is normally fairly insensitive to price. As long as there are orders, trucks, trains and ships run. When diesel use is down, it is because there are few orders. With recovery at 17%, it is difficult to be very optimistic about the state of the economy.

It took 4 1/2 years for oil consumption to return to the five-year average after the 2008 Financial Collapse (Figure 4). The present collapse is far greater and September use was lower than all but the worst two months of the last recovery from 2009 to 2013.

This is very significant. Why should we expect this recovery to proceed any faster than the last one?

Figure 4. It took 4.5 years after 2008 Financial Collapse for U.S. refined product use to recover.
The magnitude of the 2020 consumption collapse is far greater than in 2008.
September use was lower than all but the 2 worst months of the 2008 contraction.
Source: EIA and Labyrinth Consulting Services, Inc.

Paradigm Change

Much of the thinking about oil markets and the economy assumes that what is happening now is a temporary anomaly and that things will return to the previous state at some time.

We are in a depression—not a recession, but a depression. And I think the dynamics of a depression are different than they are in a recession because depressions invoke a secular change in behavior. Classic business cycle recessions are forgotten about within a year after they end—the scars from this one will take years to heal.

David Rosenberg, Rosenberg Research

We should pay attention to what David Rosenberg says but even his stern message suggests a return to normal after a number of years. Return is never a useful or valid assumption for the future but particularly not now. A new paradigm is needed.

A paradigm is a model that for a time seems to explain the state of the world better than competing theories (Thomas Kuhn, The Structure of Scientific Revolutions). Economic growth has been the ruling paradigm since the end of World War II. Technological innovation, capitalism and democracy have evolved as possible causes for the growth paradigm. The problem is that they were hardly unique to the second half of the twentieth century.

Energy is the economy. Money is a call on energy. Debt is a lien on future energy.

The extraordinary growth after 1945 was because of the widespread shift to petroleum as the primary energy source for the world. Because a barrel of oil contains the equivalent of about 4 1/2 years of human work, the resulting increase in productivity was the true cause for economic growth.

Early empires rose by enslaving conquered populations and capturing their work, and by taking their gold—a claim on work. World War I was fought initially over coal. Germany challenged England’s energy dominance by sinking ships like the Lusitania that was carrying coal. World War II was fought largely over oil. Germany’s first attacked Poland because it produced oil. Japan took Indonesia for its oil and then attacked the United States for denying it oil exports.

The United States rose initially on the backs of negro slaves. It became a major power first on the back of coal and then petroleum, the most productive slave in human history.

Great states fall when they reach the limits of their resources or they are defeated in wars trying to obtain more. The rise and fall of world powers is closely related to their access to credit which, in turn, is a call on future energy resources.

The world order has changed. U.S. dominance is declining and China’s is rising. Producing countries largely determined oil prices until 2014. Since then, consuming countries led by China have begun to assert their power.

Many people tell me, “I agree with everything you say but the difference between you and me is that you’re a pessimist and I’m an optimist.”

I am neither an optimist or a pessimist. I am a scientist. I use data to best describe the present state of things. If someone prefers a different story, I understand. Stories are good for entertainment but rarely lead to a clear view of what the future may bring much less good investment decisions.

The growth paradigm is dead or dying. Most future energy scenarios do not acknowledge slow growth. They imagine that technology will allow the world to simply switch from fossil to renewable energy without sacrificing living standards. The physics of that simply don’t work.

Most analysts incorrectly assume that slowing oil demand signals the end of the oil age. They don’t understand that all growth is slowing because of unmanageable debt and a weakening economy. Covid-19 brought that grim future to us a decade or so earlier than expected.

The world order is changing. The world will need oil more than ever because of its unparalleled productivity. Oil was responsible for the singular economic growth after World War II. It is the only thing that can prevent slow growth from becoming negative growth in that new world order.

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US Land Horizontal Rig Count Report, Week Ending October 9, 2020

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT OCTOBER 9, 2020 (2020-19)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT OCTOBER 8, 2020 (2020-24)

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ART BERMAN NEWSLETTER: SEPTEMBER 2020 (2020-8)

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US Land Horizontal Rig Count Report, Week Ending October 2, 2020

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT OCTOBER 2, 2020 (2020-18)

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Art Berman: U.S. Production still set to decline…but so is demand

COMPARATIVE INVENTORY & OIL STORAGE REPORT OCTOBER 1, 2020 (2020-23)

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US Land Horizontal Rig Count Report, Week Ending September 25, 2020

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COMPARATIVE INVENTORY & NATURAL GAS STORAGE REPORT SEPTEMBER 25, 2020 (2020-17)

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COMPARATIVE INVENTORY & OIL STORAGE REPORT SEPTEMBER 23, 2020 (2020-22)

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