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Brent Oil Faces Headwinds in 2014

EconMatters's picture




 

By EconMatters  

 

EIA Petroleum Report

 

In reviewing the EIA weekly petroleum report, the oil imports figure came in at 6.889 (Million Barrels per Day) for the week ending 01/10/14. This number compared to a year ago 8.030 (Million Barrels per Day) puts a nice cap on the downtrend which really started gaining steam in 2010 onward.  

 

Compare this imports number with the U.S. Production number of 8.159 (Million Barrels per Day) and it is clear that oil is being managed quite effectively to keep supplies and prices in check. A year ago U.S. Production was 7.041 (Million Barrels per Day), and so the goal is to try and offset imports to the increases in U.S. Production by importing less oil.

 

 

 

Managing Oil Supply

 

This is inventory and supply management 101, but unlike solar panels where supplies from China flooded the market, and prices plummeted sending many manufacturers out of business, oil and Brent especially has remained relatively high. In fact Brent is actually considerably higher than 2010 when the US was importing much more of the commodity. 

 

Sure one could say that China is utilizing all the spare oil that used to come to the United States, but one look at Australia`s export numbers versus the boom in China for commodities when they were building new cities seemingly every month, seem to tell a different story.

 

Dramatic Paradigm Shift

 

These are not small numbers we are talking about here, the differences in U.S. Production and Imports since 2010 to the current numbers is just an incredibly big delta. For example, in 2010 U.S. Production was around 5,500 (Million Barrels per Day) and Imports were around 9,500 (Million Barrels per Day) on average. When one starts running the numbers for the entire year, for three years successively, the dramatic commodity paradigm shift is huge, and the overall number is quite large. 

 

Price Independent of Fundamentals

 

Moreover, to think that price actually went against this trend in the largest oil consuming market in the world is even more astonishing when you think about it. Sure QE liquidity has in some sense inflated many of these commodities like Gold, Silver, and Copper along with every other asset known to humankind that is traded in financial markets.

 

But the major disconnect between the collapse in Iron-Ore prices with the slowdown in China and the rising with Brent Oil prices over the same time period with Global production outpacing demand on a weekly, monthly and annual basis is just an interesting feat in and of itself. 

 

Sure the Middle East has flared up several times, almost every January to April time period for the last three years the Middle East flares up for a short time period. However, no real supply disruptions have materially occurred, and after several weeks of demonstrations, things routinely go back to normal. In the overall big picture these Geo-Political events are mere blips on the radar screen in the oil market.

 

Middle East Production Changes

 

Interestingly now that Iran, Iraq and Libya are all set to pump more oil in 2014 is this finally going to be the nail in the coffin for the Brent contract, so that it trades the bulk of the year on par, or even at a discount to WTI? Not if the US Refining Industry has any say in the matter, this WTI-Brent Spread is crucial for their business model, and they have a vested interest in defending the spread at all costs. 

 

You don`t think this spread exists solely due to natural supply dynamics of the underlying products do you? There are vested interests and stakeholders at play here; the spread is encouraged because it meets the needs of many stakeholders on both sides of the pond so to speak.

 

Where is Supply Really Going?

 

It is obvious that a lot of this oil is just staying in the ground; some of it is probably being stored in China on a resource play as they build up their reserves. 

 

But at some point reserves fill up, and these Middle East countries need more and more revenue to meet their expanding budget commitments. Therefore, holding back production to artificially manage global prices by limiting supply works for a while but eventually these same producers are going to need to start producing more to meet the expanding revenue requirements, especially if price is unable to compensate substantially for much lower production volumes. 

 

Consequently, when this happens the world could experience its first real meaningful break in oil prices in the last 10 years (apart from the financial crisis temporary drop) even with a slightly improving global economy. 

 

Final Thoughts

 

The three contributing factors would be the dynamics of the North American Oil Production market, the ending of QE Stimulus, and the eventual increased production from the Middle East (both in terms of New Oil coming onto the market & the increases in existing supply to meet revenue objectives which is currently being purposefully withheld from the market).

 

It may take towards 2015 for this to all play out, and with more fuel efficient vehicles in the developed world, and China already struggling with pollution overload ( the last thing they can handle is more cars on the road), it makes intuitive sense that at some point the fundamentals are going to dictate a lower oil price. 

 

Furthermore, one would think that Brent comes under increased pressure in 2014; and accordingly it would seem that any rally in Brent should offer up a nice entry point on establishing a short position in the commodity. 

 

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Fri, 01/17/2014 - 19:02 | 4342469 disabledvet
disabledvet's picture

Hmmm. "Peenumundie was unacceptable to the Great Powers of the Day." Save one of course...

http://en.wikipedia.org/wiki/Peenem%C3%BCnde

"No shortage of natural gas in Libya" or course. And of course the "subject here is about oil." Hmmm. Here's a huge oil company you can invest in right now:

http://seekingalpha.com/symbol/SZYM?source=search_general&s=szym

They can produce probably 1000 barrels a week. More than enough for all of mankind.

"Combining the power of the sun with enzymes."

And no, I don't expect sugar prices to soar anytime soon either.

http://seekingalpha.com/symbol/SGG

Already down 8 percent YTD.

Go ahead Goldman/Sachs...try and blow the market for corn sky high. http://seekingalpha.com/symbol/JO

No wonder the Columbians are ticked off.

Fri, 01/17/2014 - 18:53 | 4342435 tony bonn
tony bonn's picture

oil prices should be considerably lower than they are, but the same banksters manipulating the price of gold manipulate the price of oil.

Fri, 01/17/2014 - 17:37 | 4342212 DaveyJones
DaveyJones's picture

"it is clear that oil is being managed quite effectively to keep supplies and prices in check"

the effect of what? that despite a horrid economy the world demand of the most vital "commodity" and foundation for economic activity remains stubbornly high?

Could it be that we are throwing incredible amounts of new resource (and money) into extraction but we are not able to increase world production?

Could it be that our current domestic increase is not classic oil at all and not only increasingly more expensive but ultimately returns much less resource not only in energy density but also out in supply lines that will last a short life?

Fri, 01/17/2014 - 18:31 | 4342358 geno-econ
geno-econ's picture

Marginal cost of each additional barrel of crude is continually rising------not sure about additional cost of nat gas btu, but substitution by utilities is well underway and provides chemical industry lower feedstock cost in US. Conversion of nat gas to liquids is still costly with export in liquified form attractive due to global price differential. Therefore nat gas puts some downward pressure on oil and gas usage in US but not globally. Political situation regionally also a major factor in price and availability

Fri, 01/17/2014 - 19:08 | 4342477 FeralSerf
FeralSerf's picture

Is marginal cost adjusted for the true amount of inflation also rising?

Fri, 01/17/2014 - 17:18 | 4342162 geno-econ
geno-econ's picture

So why is Exxon, Chevron and Royal Dutch trading at all time highs ? Oh I forgot about the Fed printing which lifts stocks and commodities in order to stimulate the economy and thereby relieve pension funds etc. Maintaining higher fuel prices is also a form of taxation.

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