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For Oil Price, Bad Is The New Good

Tyler Durden's picture




 

Submitted by Art Berman via ArtBerman.com,

Lately, oil prices have gone up when they should have gone down. In the last week, OPEC decided not to cut production and the two major energy agencies reported that the world over-supply problem is getting worse.  Brent futures increased from $62 to $65. Bad is the new good.

The expected bad news on Friday, June 5 that OPEC would not cut production was skillfully cloaked in positive statements about growing demand. On Monday, June 8, Brent opened at $62.69 and rose to $65.70 over the next two days.

On Tuesday, June 10,  the EIA published its monthly Short-Term Energy Outlook (STEO) that showed that the production surplus responsible for low oil prices had increased in May to almost 3 million barrels per day (bpd).

World Liquids Production Surplus or Deficit & Brent Crude Oil Price_June 2015
Figure 1. World liquids production surplus or deficit and Brent crude oil price. Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

Production fell by 106,000 bpd but consumption fell more by 156,000 bpd (Figure 2). Oil prices rose $2.19 per barrel based on that good news.

World Liquids Production, Consumption & Brent Crude Oil Price_June 11 2015
Figure 2. World liquids production, consumption and Brent crude oil price.Source: EIA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

On Thursday, June 11, the IEA came out with its Oil Market Report. The message was the same. The production surplus for the first quarter of 2015 was the highest in a decade at 1.85 million bpd and, obviously, the highest since the oil price crisis began in June of last year (Figure 3).

IEA Chart_Surplus-Deficit 11 June 2015
Figure 3. World liquids production surplus or deficit. Source: IEA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

The oil-price crisis occurred because supply (production) exceeded demand (consumption) beginning in the first quarter of 2014 (Figure 4). That situation has persisted. First quarter 2015 supply was about the same as fourth quarter 2014 but demand was lower, not a good thing.

Chart_IEA Quarterly Liquids Supply & Demand_June 2015
Figure 4. IEA quarterly liquids supply and demand. Source: IEA and Labyrinth Consulting Services, Inc.
(Click image to enlarge)

There is optimism about demand but what is that based on? It’s based on increased vehicle miles travelled in the United States. I agree that is a good sign but the U.S. is not the entire world.

There is optimism about decreased U.S. rig counts but U.S. production has increased. The EIA estimates that tight oil production will decline by 91,000 bopd in July but that is more than balanced by new lower Tertiary production in the Gulf of Mexico.

There is optimism because there have been inventory withdrawals in the U.S. but those always occur at this time of year.

I agree with all of this optimism but it is basically well-informed sentiment. The hard data is that we have a production surplus in the world that is getting worse, not better–unless the data from IEA and EIA is somehow unreliable.

Markets don’t always behave rationally. Oil prices do not always reflect fundamentals like supply and demand. Over time, however, markets come into balance with fundamentals. Right now, oil prices are profoundly out of balance with fundamentals. Look for a correction.

 

 

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Sun, 06/14/2015 - 11:29 | 6195409 post turtle saver
post turtle saver's picture

Peak Price

Sun, 06/14/2015 - 13:20 | 6195612 sushi
sushi's picture

Do the above graphs illustrate the changes in the price of a bbl of Brent over time or do they deomonstrate the declining value of the USD and a growing reluctance to part with a precious commodity for increasingly worthless coupons?

Inquiring minds want to know.

 

Sun, 06/14/2015 - 13:35 | 6195654 Paveway IV
Paveway IV's picture

Saudi Arabia is weeks away from a coup. Some royals are under house arrest, some are planning on having the King declared incompetent.

The SA government coffers have been looted. Yemen just killed the general serving as Royal Saudi Air Force chief-of-staff with a SCUD. A good portion of the Saudi Army is Yemeni.

When the baloon goes up in Saudi Arabia, $200/bbl oil will not be far behind. Not because it's worth it, but because that's what the oil companies can get away with when Reuters starts publishing pictures of the burning oil wells in the Gawar Field.

War is always opportunity. This will somehow help Israel and/or Qatar get their pipelines built across Syria. Exactly how is anyone's guess, but all profits for them have always flow from the blood of others. The ensuing oil crisis is the perfect trigger for a stock market collapse and bank run in the U.S. - and Obama's long-planned for non-martial martial law.

Jade Helm doesn't have anything to do with it. That's a small military exercise. This will be big. Really big. And no arms involved - nobody to wave a gun at. Everyone will be sitting in their homes starving to death without power or the internet and unable to drive anywhere - but there won't be anywhere to go, anyway.

Sun, 06/14/2015 - 13:55 | 6195708 Fukushima Fricassee
Fukushima Fricassee's picture

A japanese farmer does not care. He has plenty of rice.

Sun, 06/14/2015 - 11:32 | 6195414 Stained Class
Stained Class's picture

How's the storage situation lately? And how come we never hear anything about Morgan Stanley here?

Sun, 06/14/2015 - 11:49 | 6195431 cassotto
cassotto's picture

why should the price go down? are you trying to say you know what the price should be?

Sun, 06/14/2015 - 13:18 | 6195606 NihilistZero
NihilistZero's picture

No, he's saying the data should he setting the price based on rational market actors. Those actors are in very short supply apparently. Yet another place where Ctrl-P FED is preventing true price discovery.

Sun, 06/14/2015 - 11:51 | 6195439 kaiserhoff
kaiserhoff's picture

Peak price is traditionally July 4.  After that, wear your hard hat.

Sun, 06/14/2015 - 11:52 | 6195441 pachanguero
pachanguero's picture

Ever thing is flatlining indicating lower growth......

Sun, 06/14/2015 - 11:54 | 6195445 JPM Hater001
JPM Hater001's picture

My mom was in town this weekend.  She manages a Gas station store for a midwestern company.  She says they had to cut gas prices fast to push product because as prices rose the company brought more and more futures contracts to lock the lower prices.  That oil is being delivered and they have to take delivery on thier product.  That'll drive deflation right?

Sun, 06/14/2015 - 11:59 | 6195454 JPM Hater001
JPM Hater001's picture

To answer someones question how's storage?  I dont think there is much choice as stockpiles grow.  It's got to be turned to gas and eventually that has to hit the street price.  The company will take a loss on every transaction in gasoline.

Sun, 06/14/2015 - 11:56 | 6195449 FreeShitter
FreeShitter's picture

The entire shit show has topped.

Sun, 06/14/2015 - 12:12 | 6195453 Soul Glow
Soul Glow's picture

The STEO Report's World Liquids Fuel Production findings show oil production is down for the first time in years last quarter.  Price stays buoyed, tethered to weak currency (as the currency directs all inflation, especially gas prices) even though demand stays relatively flat.

Oil production could form a downtrend if demand doesn't pick up and shale wells continue to shut down.  Once capped an oil well stays capped too.  The cost to break the seal is high and not usually worth it.  Maybe in a Mad Max situation we uncap wells.

SHORT-TERM ENERGY OUTLOOK :

http://www.eia.gov/forecasts/steo/report/global_oil.cfm

Sun, 06/14/2015 - 12:08 | 6195470 GeorgeHayduke
GeorgeHayduke's picture

Since at least 2008 the price of about everything has not been a reflection of 'fundamentals'. Why should it be so right here right now with oil? Or anything else. It's all BS!

Sun, 06/14/2015 - 12:15 | 6195488 Soul Glow
Soul Glow's picture

This is what we get when we have a fiat currency as our medium of exchange.  Price distortion has no bounds when the currency used has the worth of the paper it is printed on.

It is this that makes people trade dollars so fast.  Get rich?  Spend those dollars.  Buy a house, buy a car, take a vacation.  Don't store those dollars in a bank because who knows what could happen to them.  They could lose their value to inflation or the bank could rob its depositors, that has happened frequently in history.

If you do need savings buy stawks and bawnds because then you get a return!  Don't buy gold, as gold has no return.  Gold also isn't worth anything but the dirt it was mined from.

:)

Sun, 06/14/2015 - 12:19 | 6195494 tuttisaluti
tuttisaluti's picture

Surplus in production.....? Half of the tankers are full with water just to make you believe we have a surplus..... 

Sun, 06/14/2015 - 14:19 | 6195782 agNau
agNau's picture

Dollar still backing and filling. Next wave sends oil & other commodities lower.

Sun, 06/14/2015 - 15:03 | 6195879 In.Sip.ient
In.Sip.ient's picture

So the "surplus" is in the <2% range and y'all think the sky is gonna fall???

 

Really?

 

Unless everything else falls as well, the trading value of oil... right now...

is around $75/bbl !  And unless those other things ( like gold ) fall

in price an oil "correction" is going to be very short lived.

 

Indeed, the contradiction between the price of oil

and everything else is pretty stark.

 

 

 

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