Art Berman: Oil Is Heading Lower Near-Term Before "Economically-Crippling Moon-Shot"

Tyler Durden's picture

Submitted by Aaron Chan via www.MacroVoices.com,

This week’s marked sell-off in crude oil prices came as no surprise to petroleum geologist Art Berman, who has been predicting the price decline for weeks now. More to the point, Berman says it’s not over yet and lower oil prices are still to come. Berman gave an excellent long-form interview for this week’s MacroVoices podcast. The program begins with a market summary and the interview begins at 7:09, and is summarized below. After the interview, a second short interview follows with the founders of #OOTT, the Organization of Oil-Trading Tweeters, an online community of oil traders who share research and trading ideas on Twitter.

 

Berman begins by observing that it’s Labor Day weekend – the end of summer driving season and historically speaking, what should be the end of a period of seasonal de-stocking of crude oil inventories, which is critically important to make room for the storage demands that predictably come during fall refinery maintenance. But Berman shows that nation-wide crude oil inventories have actually INCREASED to the tune of 6.46mm barrels over the last 6 weeks, a period when inventory levels historically move in the opposite direction!

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Berman then introduces his Comparative Inventory charts, which measure inventory growth relative to historical norms, effectively factoring out seasonality effects from the data. Seen in this view, the build in inventory over the last 6 weeks is actually 16mm barrels above and beyond seasonally adjusted historical norms, completely anomalous given this time of year:

“This has really been a surprising development and this translates into really huge changes in comparative inventory. So, we’re adding millions of barrels a week in terms of comparative inventory, it amplifies that effect, and I think in a lot of ways that helps to put to put the downward price into some context. It also helps to understand how totally artificial this latest price rally has been about sentiment and hope that maybe OPEC is going to do something.”

Later in the interview, Berman is emphatic: “Buckle up for what’s coming”, as he predicts that the imminent shift from a seasonal de-stocking period to a seasonal re-stocking period will bring a series of markedly larger crude oil inventory builds.

Next, Berman shows that a 6-month price cycle has recurred in WTI prices for the last two years. He predicts that the next significant move down is now upon us:

“What we saw a year ago was a very rapid increase in August (surprise), prices went up to $50, rattled around, and then crashed down to $26 by the end of 2015. It’s hard not to remember we saw something like this a year ago. Is it important that it happened at the same time of the year? Well, again, we’re in fall refinery maintenance season and we’re seeing this anomalous build in absolute and comparative inventories that we didn’t see a year ago. All it would take is some more economic bad news about China, the OPEC meeting in Algiers this month doesn’t produce any meaningful results.”

 

Berman goes on to explain why he believes that Cushing and PADD 3 (Gulf Coast) inventories, in aggregate, are the most important determinants of future oil prices. By this measure, the picture is once again quite bleak, with Cushing+PADD3 inventories increasing by 5.5mm barrels in the last 6 weeks, and 2mm barrels this week alone!

 

Berman expresses dismay that the capital providers “haven’t wised up yet”. He observes that despite deteriorating fundamentals, if anything, credit appears to be increasingly available to E&P companies:

 

Next, Berman likens the oil market price cycle to what he calls Einstein’s Definition of Insanity, observing that each time another round of OPEC propaganda about a “production freeze” induces another short squeeze, eventually gravity sets back in and fundamentals take over again:

 

Elsewhere in the interview, Berman expounds on that point, saying that any production freeze rhetoric from OPEC is “pure theatre”, and meaningless in terms of actual supply/demand fundamentals.

"First of all, [oil] market balance isn't the problem. By freezing production, forgetting for a minute what that production may be, how in the world does that affect market balance?  It really doesn't at all. If we're talking about a 2mm barrels per day of production surplus, maybe that helps, but market balance isn't the problem. I think it's theatre and we're running out of ways to get out of this problem quickly. [The upcoming OPEC meeting] could be setting us up for a huge disappointment."

Berman goes on to observe that where most analysts expected U.S. domestic production to “fall off a cliff”, that never happened. Meanwhile the rig count is on the increase, particularly in the Permian basin where the lowest break-evens [in domestic U.S. shale] are found.

 

An additional note on "hope factors" for increased prices, Berman states the hope factor for rising oil prices are fading fast:

“Whether you subscribe to the apocalyptic view of the drilled and incompleted wells, or rig count, I think we’ve gotten to the point where our expectation is that U.S. production is not going to drop much more. That has to have a psychological effect, while we were six months out and production was dropping several hundred thousand barrels a day per month,  there’s hope...I think the hope factor, even though we have cut out 800k barrels per day, has faded - it’s gone. So what’s the next shoe to drop? Where are we going to find the solution, the silver bullet? I think we’re running out of options.”

Berman debunks the myth that lower prices automatically result in increased consumption with this very telling chart:

 

Berman emphasizes that below $40 per barrel, lower prices no longer translate to a pickup in demand, contrary to popular belief.

"The economy doesn't have any more [oil consumption] EXCEPT at rock-bottom oil prices. What this is telling me is that there is a [consumption] ceiling and this helps explain the inventory issue as well - if people simply limit their consumption at some price-level that's much lower than what producers need to breakeven, where does it all go? At some point it comes back to haunt us is where it all goes. At some point, because of these Einstein insanity cycles we're going through, we will run into a supply deficit and that's a scary thing."

After reviewing the chart book, several more topics are discussed at length, including decreased price sensitivity to elevated inventory levels since 2012, because of increased pipeline capacity OUT of Cushing to PADD3, the change in trajectory of junk bond pricing possibly being related to a strategy change from OPEC, and much more.

The interview concludes with Berman’s long-term forecast: Continued LOWER oil prices for several months to a year as we work through the inventory glut, followed by what Berman describes as a “moon-shot” (massive increase in oil price) as lost production capacity from offshore eventually catches up with the market. Berman predicts that the “Moonshot” will cripple the global economy resulting in a global recession, eventually forcing energy prices much lower again.

"We're in a cycle of lower prices for some time to come (months or even years) certainly until we work through the inventory overhang of 140 million barrels. There really no justification in history or logic for a return to oil prices of $60 or $70/bbl. We'll get this cycle of bouncing off of ceilings and floors below the price the industry really needs to keep itself whole. And that's because the economy is fundamentally weak. But, we're deferring investments in proven reserves - all we got to do is spend a couple of billion dollars to develop existing proven reserves - and we've deferred somewhere in excess of 20-30 billion barrels just in the last year and half and we continue to go down that road. So, there is going to be a time, no matter how weak the economy is, no matter how much we can't change this, we're going to end up with insufficient to meet our most basic, fundamental transport and manufacturing needs. When that happens, we'll see a moon-shot in oil prices."

The full interview is definitely worth a listen this Labor Day weekend. After the interview with Berman, the founders of #OOTT, the Organization of Oil-Trading Tweeters, are interviewed about the rapid growth of their organization and the free research they offer investors.

 

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MajorFall's picture

What he is missing is that the economy does not stand still, not only will we recover oil even more efficiently but cars will be electric propulsion utiling a vaiety of fuel sources...

cossack55's picture

OTOH, I have been eyeballin'  great 66' Caddy and a superb 69' 442.  Hmmmmmm.......

Escrava Isaura's picture

Warning:  When I said in December 2014, that my country is setting herself up for a major fiasco, I was not idly joking nor was I seeking cheap publicity. I merely tried to encourage those who care to listen to refocus their thinking.  Is anyone listening a year and a half later? —Tad Patzek, Professor of Petroleum and Chemical Engineering at the Earth Sciences Division and Director of the Upstream Petroleum Engineering Center in KAUST, Saudi Arabia.

http://patzek-lifeitself.blogspot.com/2016/03/is-us-shale-oil-gas-production-peaking.html

 

stacking12321's picture

So you admit that you often idly joke and seek cheap publicity?

Escrava Isaura's picture

No, to the contrary. Here to learn and to share what I learned.  

 

Doom Porn Star's picture

Here to learn?

Curious..

Have you successfully learned anything about Thorium or the Fischer-Tropisch process; -and if so: what?

Mustafa Kemal's picture

Ive wanted one of those 442s since 1969.

doublesharp's picture

I had a 1968 442 back in 69. Loved it. Now I drive a Honda Ridgeline and a Ford Transit 150 XLT window van.  I'm not smart but I've stayed in the stock market since the 60s and am now a 1%er. Is this all there is is what I'm asking at age 65. 

MASTER OF UNIVERSE's picture

A 1%er, eh!

 

You won't be a 1%er in the near future when Deutsche Bank pulls a Lehman, doublesharp. If you give everyone on Z/H all of your ill gotten gain we will spare you from being hanged in the street when we loose the dogs on you.

 

Hang em' High

MasterControl's picture

What you miss is the economy is currently standing still.

Escrava Isaura's picture

Electricity comes from a finite resource. Neither the electric car and the electric grids can work without oil.

Both are heavily dependent on oil.

Crude oil has no substitute. And humanity depends on it. God have mercy!

Michael Pollan: “In the US, it takes 10 calories of fossil fuel into the system to grow 1 calorie of food.” 

http://blogs.scientificamerican.com/plugged-in/10-calories-in-1-calorie-out-the-energy-we-spend-on-food/

 

Doom Porn Star's picture

And here I thought that sharlatan, err- I mean genius Musk had figured out how to plug those lauxury go-carts directly into the Sun via Sold-R-City..

Irving Phelps's picture

Guess the explorers and producers will get a little taste what the central banks have/are putting the PM miners through. Couldn't happen to a nicer group of crooks!

pndr4495's picture

All those charts & graphs, they are 100% spot on precise at predicting past prices. Human behavior is not so predictable. Did Berman ever dirty his hands with crude oil or with drilling mud or have to work with other roughnecks to get it out of the ground? Doubtful. Hydrocarbons are losing favor to more efficient means of energy/power production. Drive along Interstae 80 in America's heartland and take a look around at the ever increasing OPERATING wind turbines.

ipso_facto's picture

'... ever increasing OPERATING wind turbines.'  You're seeing the result on eight years of Federal government sudsidies to wind power.  They exist ONLY DUE TO THE SUBSIDIES.  The 'Green Revolution' is a fraud enforced by the Feds.

pndr4495's picture

I will never be able to change you to think like me nor will you ever be able to change me to think like you. I appreciate your effort though. Here's a section of a Wikipedia entry:  A 2009 study by the Environmental Law Institute[33] assessed the size and structure of U.S. energy subsidies in 2002–08. The study estimated that subsidies to fossil fuel-based sources totaled about $72 billion over this period and subsidies to renewable fuel sources totaled $29 billion. The study did not assess subsidies supporting nuclear energy.

FredFlintstone's picture

wind and solar account for 2% of US energy production. Fossil fuel production is 44 times that. so it looks like there is more bang for the "subsidy" buck for fossil fuels.

Barnaby's picture

On a cold night if you sit by a fire long enough, you'll actually drop that pinwheel.

You might even burn it.

Don't make it right, it just makes it human.

rtalcott's picture

Is that normalized anywhere to $$$/unit capacity or energy produced?

pndr4495's picture

The erg efficiency is not what I was observing, nor what I observed. What I did see within the space of 9 months was a marked increse in the number of wind turbines and an increase in the number of operating wind turbines. I had to drive my son out to Oregon for his assignment in USCG during late November 2015. I just drove back with him this past week for his assignment in VA. I was struck not only by the increase in the number of turbines but also by the fact that they were all operating whereas when we were going out in 2015 the number of turbines was fewer and there were some that were not operating. In addition, while driving back we saw quite a few big rigs with safety escorts delivering the housings, the blades, and the superstructures to wherever they were going to be placed. Of course it could be someone wanted to use more energy in getting these things up and running than they will ever deliver over their lifetimes. Inefficiency and corruption are rife in our country.

Tzanchan's picture

Hey Ipso, you are so brainwashed about the bull you've willingly consumed by the so- called Solyndra and Fisker "scandals" u need a window put in ur stomach cause ur head is far up your rear u can't see. A main reason oil companies exist is the teat sucking thay have done for years on the taxpayers, so call ur Obamacare provider and get on the list along with about 75 million other people who need the procedure....You have a clue what the oil depletion allowance is? Look it up, you wite off the entire investment when it's made and if it makes money that's sheltered too! Pendejo...

scaleindependent's picture

Very interesting. Thanks.  

"Oil Depletion Allowance".

So it's not just solar and wind that are subsidized.   

Youri Carma's picture

2 Year Old Siemens Turbines Falling Apart: Wind Farm Investors, Get Out While You Can
https://stopthesethings.com/2015/02/01/2-year-old-siemens-turbines-falli...

MonteChristo's picture

I happen to live in an area in South Western PA where we have lots of coal and lots of windmills. The windmills are most often not turning at all, and when they do, they are not turning at the narrow speed parameters to generate. They would fold fast if not for the tax subsidies as well as exemptions to the grid requirements for generators. On the other hand, there are the huge coal reserves remaining with mines closed or mothballed everywhere thanks to Obama and his crazy ilk. There are today technologies for processing and burning coal which are very "clean", but we are not guided by science and truth, but by superstition, ignorance and political correctness. Huge unemployment up here, ready for counter-revolution. I will say, thorium reactors are the way to go for electricity needs.

adr's picture

In twenty years nothing about oil will matter.  There won't be enough people in the world that will be able to afford to drive. 

When we are all eating reconstituted Rothschild droppings for food,  driving will be a luxury only the 1% can afford. 

Elysium is the future. I don't remember many cars for the masses in that movie. 

WernerHeisenberg's picture

adr, you have it exactly right.  In twenty years, I should be dead of natural causes  Still, the thought that I might be fated to live that long and see the shitstorm fills me with dread.

booboo's picture

Don't assume a Hollywood movie with lots of blue screen is revelation, if it were I would "loop" back and strangle you in your crib so you wouldn't suffer such misery.

The Duke of New York A No.1's picture

I guess Berman's never heard of the FED's Printing Press before - IMO; unlikely Oil sees a $38 handle for more than a few nanoseconds before the Big Printers press their CTRL-P button.

Dragon HAwk's picture

So speculators ruined the markets, who would have guessed   if only Oil didn't take up so damn much Room, maybe some ETF's would help  you know, some virtual flexible storage. Cloud Oil Storage flex space, could solve everything. Can't we sell some Naked Draws  you know lower the numbers, so things look better and go up.

847328_3527's picture

$30/ballel oir is Mee Tu Long's prediction.

Escrava Isaura's picture

Closer to $20 is mine. But that is at the first stage “peak” of the financial collapse. Once the shortages starts, prices won’t matter. We’ll have bigger worries.

 

 

Barnaby's picture

Oh no! My Evo only has a 14.5 gallon tank, whatever will I do?

Maybe make more money by working more hours or restricting my driving or just being more economical altogether?

Oh no!!

MonteChristo's picture

You could switch to a steam car and burn coal.

directaction's picture

Ridiculously overestimated "proven" and "estimated" conventional oil reserves throughout North America, Russia and the Gulf states will be severely tested in the next few years. And they will all fail that test, except Russia. 

When that happens the heavily congested vehicle traffic now experienced throughout the world will at first ease, then after a few more years the roads will be littered with the carcasses of hundreds of millions of vehicles for which petroleum will be unavailable at any price.

Unless some other disaster such as war, disease, plant virus, famine or economic collapse strikes first, the end of the Age of Oil will be the end of Western civilization, and the expected human dieoff will strike fast and hard. Most alive now will witness this catastrophe, that's how soon it will be. 

Have a nice day.    

whiskeyjim's picture

Ok. I've heard enough.

We need Obama to take over the oil industry here in USA to moderate supply and smooth out prices for all of us!

That will fix it.

Why Bother's picture

To me I don't care if the price of oil goes to $10 per barrel. I'm buying a small car again. Had a big truck many years ago and loved it but I'm superstitous about things I buy and Murphy's law would likely reverse the situtation and make the price go up for driving. Besides I only live 8 miles from the office in Southern California.

Let the oil prices drop!

Doom Porn Star's picture

Thorium Nuclear Reactors and Fischer-Trophisch = Abandon the wells.

We can and will reclaim/burn large quantitites of what is presently merely dangerous nuclear waste/dirty bomb materiels first once the systems are running; -thus cleaning up the fucking mess the weapons fixated first generation of nuclear power stupidity produced while we are at it.

WIN WIN WIN & MORE WIN.

The Era of Petroleum/'Fossil fuels' dominance is OVER as soon as the Thorium tech starts to go online and people realize that safe and clean nuclear power plants can emit carbon neutral liquid fuels to power automobiles and airplanes as a by-product of powering the grid.

 

Infield_Fly's picture
Infield_Fly (not verified) Sep 5, 2016 12:21 AM

BULL FUCKING SHIT!!!

 

Oil is heading lower - this reads like a puff piece for all those that bought at 60 per barrel - to "hang in there".

CHX's picture

The global oil prices have fallen from >100 to <30 because of a) the US shale boom fueled by cheap credit (world production minus US has pretty much stagnated) and b) by a tepid global economy that cannot afford >100 oil prices. At prices below about 40, a vast majority of producers will go bankrupt sooner or later, which would be a coup de grace to many US banks that "funded" the shale oil industry (bad loans). It's actually ironic to compare these black gold dynamics to the yellow's metal dynamics, where the producers where also suffering badly, but the price needed to be suppressed despite there being a shortage of the actual goodies... So my guess is, they will try and let oil trade in some range between say 30 and 70, where real producers will make a solid floor and the real economy a solid ceiling... Since there is a lot of oil in storage, the real economy will be able to limp on for quite some time, so any short-term scenario of decaying cars all over are pretty far-fetched fearmongering right now. As always, time will tell... GLTA

Sapere aude's picture

Yet another completely ignorant story, playing with charts and derivatives rather than focusing on what's really there.

Consumptions falling so fast that the U.S. is importing more oil now than it did in 2012.

Inventories are made to rise by importing oil to then drop the price on far less inventory increase than the import figures

How many of you thinking something is in a glut and telling everyone else the price is likely to fall then go out and by millions more?

See how ridiculous the game really is?

Now I know some who get emotional who wont come up with facts will mark this down, but the facts are the fact

There is no oil glut, oil consumption worldwise is still rising, even in the USA

Just take a look at the energy figures produced recently showing a massive fall in coal, a large increase in renewables, but where those renewables represent less than ONE PER CENT OF the growing energy needs in the USA, and where oil.....dropped off the scale did it?.....No to the contrary oil use was up 1%

So all the money pushed at renewables is already in the system, and producing a lowly 1% of the most expensive energy produced on the planet when it comes to subsidy and all costs.

ALL of the major super giant oilfields in the world are in terminal decline, yes ALL of them, and its provable.

These oilfields like Ghawar has produced the bulk of the world's oil since 1947

For decades now we have been using more and more oil, but finding only a fraction to replace that oil, and no real Super Giant fields, which is why we were forced to look at Ponzi shale, where for every $1.50 spent just $1 of oil has been recovered, and ZIRP and NIRP have helped save the backsides of some companies, along with repetitive funding exercises and asset sales, but where not ONE u.s. big oil company has ever made a profit on U.S. shale oil and where the costs of plugging and abandoning what are now stripper wells is kept off book, so instead old legacy wells limp on at a loss producing 30-50bbls a day because its still cheaper than the substantial cost of plugging them.

Ironically even the dodgy figures from the IEA show the energy situation in the USA and you can get bet your last dollar that they are fiddling with the figures and are as accurate as Hillary's honesty statements.

Amazes me that many US citizens are so gullible and yet they know they are being fed bullsh on so many things but still choose to believe selective stories based on what they hope to be the case rather than what is the case.

OIL IS NOT IN A GLUT - the opposite is true which is why so much time and money is expended to pretend its a glut but even then it can't hide the massively increasing oil imports that will grow and grow even with already massaged figures.

Did you know the SPR was designed to be bi-directional, so why was that? Why would they want to pump oil back to an oil well, to an oil delivery pipeline if not to claim that as production in any psyops or propaganda campaign.

Many of the shale wells in Texas are interconnected bi-directionally to the SPR and the SPR is being used to prop up expanded oil production figures and still that isn't enough to prevent the USA needing to important almost 9,000,000bbls a day last month.

In 2015 WORDWIDE OIL discoveries were only 10% of the amount of discoveries in previous years, and even in those years much more oil has been used than has been discovered, with the world relying still on these super giant fields, now in terminal decline. PROVE IT: Easily, look up EOR and look up waterflooding, as this takes place when a well is past its peak, where depletion curves start to fall off a cliff and to try to keep production wells are flooded with water to increase the pressure and eek out the last drops of oil in wells.

A  few years ago no sour oil was used, now it provides the majority of all oil used such is the desperation. Not fiction, look it up yourself, originally sour oil was’t even worth drilling

 

More and more money has chased less and less oil resulting in ponzi shale schemes with multiple bankruptcies and even more disinformation from companies forever suggesting cost cutting makes their oil profitable but where their accounts show otherwise.

 

We use on average around 95,000,000bbls of oil PER DAY or 34,675,000,000BBLS A YEAR USED

 

China’s oil production fell off a cliff, India’s thirst for oil is like a new China in consumption terms.

 

Last year just 2,700,000,000 of new oil discoveries were made with none being really super giant fields and the majority being smaller oil finds making up the total

 

By 2026 world oil consumptions even allowing for costly renewables will rise to 105,300,000bbls a day, because like it or not oil has so much more power on hand than most other energy models.

 

It has more power per gramme than TNT. Creates medicines, fertilizers and can be a clean fuel and also provides significant taxation unlike the seedy over subsidised renewable energy scammers.

 

Take a look at the energy used and produced by renewables where all of that power is already in the system and has made no difference as oil imports are rising.

 

This year only 736,000,000bbls were discovered and again the majority in high cost low reserve fields.

 

Offset that by the 95,000,000 of oil PER DAY then multiply it by the 365 days of a year!

 

34,675,000,000BBLS A YEAR USED

ONLY 736,000,000bbls DISCOVERED!!!

http://www.theburningplatform.com/2016/09/03/the-rate-of-change-in-u-s-e...

http://www.bloomberg.com/news/articles/2016-08-29/oil-discoveries-at-a-7...

Sapere aude's picture

Surprised at the naivety of some who know that they are lied to in other areas of politics but believe what they want to believe when the facts do tell the real story.

Do you remember being bombarded with pictures of Iranian oil tankers at the ready to flood the market with 30,000,000 bbls of oil......it was all rubbish wasn't it!!

It showed all sorts of tankers, most of them with the plimsoll line showing they were empty. The same picture was later adapted and used in a similar story about massive queues waiting to dock oil in Galveston, including empty tankers, cargo boats, and every other propaganda tool at the disposal of those who like to swing a tale of propaganda.

The surge to renewables is a matter of desperation not choice, and the constant referring to inventories worldwide is ridiculous because like the USA many of the world's governments have rules that REQUIRE the storage of up to 100 days of oil consumption, so as consumption rises the INVENTORY has to rise to keep up that 100 days supply. In the EU its law! So why quote these inventories as if they are surplus?

NO, oil is running out, even the CIA report a few years back that is still available on the Internet showed they expected that to have happened by now and were investigating replacing all U.S. military oil use with other fuels, but it worked out too expensive, they even tried a cabbage plant called camina but it was more than ten times as expensive.

So we get these games with the Saudi's pretending they are exporting millions more than they are, because their super giant fields are in decline, and they want to keep their quota if any OPEC deal took place, and where none of their wells is audited, none of the decline rates, none of the depletion rates, and not even their production figures, so they can claim what they like, and of course it helps the USA for the Saudi's to pretend they are outputting millions more than they are, becuase at the same time it hits the Russian economy.

Why do you think Iran was let back into the fold by the USA...Love?

No its desperation to get their oil into the equation too, but sadly the Iranian oil fields are some of the most mature oil fields in the world, so are in terminal decline anyway.

 

yngso's picture

Congrats to sapere aude, who has abolished supply and demand. I'm in the central banksters-leaning-on-all-other-banksters to keep-normalcy- going-until-the-election camp.

Miggy's picture

Me too. I just cannot believe the recent crash in oil prices have anything to do with fundamentals and everything to do with keeping the game alive a while longer, pretty graphs aside. Not based on the election but the whole game in general. The economy is on life support with debt out of control.

 

Sapere aude's picture

As I suggested though who has argued against the facts...no one.

yngso. Suppy and demand are healthy with demand rising and supply fallng, unless you believe in fairies or Hillary.

If supply was rising, youd have to ask why the US imported almost 9,000,000bbls per day last month, or why the link I gave showed that oil use is still increasing and will do for the foreseeable future, with India, and there are so many countries out there that would like 24/7 power supplies, autos, washing machines, running water, medicines, fertilisres etc.

 

If anyone want to actually contradict the information and provide sources for it, I'll look at it, but the facts are very different to the propaganda to keep oil price low