"There’s No Growth": World's Largest Oil Trader Has A Stunning Warning For OPEC

Tyler Durden's picture

When it comes to the oil market, the narrative over the past year, ever since OPEC's first aborted meeting last April, has been just one: limit crude supply in hopes of rebelancing the oil market, reducing excess inventories, in the process sending the price of oil higher. However, echoing what we have warned for many months, overnight the world’s biggest independent oil trader said OPEC's efforts could be in vain because the oil producing cartel is seeking to control the wrong thing: it's not a matter of supply, but global demand which is simply not there.

According to Vitol Group, the world's biggest independent oil trader...

... demand isn’t expanding as much as expected, and U.S. shale output is growing faster than forecast, Bloomberg reports. As a logical outcome, that’s increasing the burden on the world’s biggest producers, who need to stick to their pledges to cut supply just to keep prices from falling, said Kho Hui Meng, the head of the company’s Asian arm. Meanwhile, shale continues to capture OPEC, and mostly Saudi, market share as do countries such as Iran and Libya which are not bound by the Vienna agreement production quotas.

But the biggest variable is demand, of which there is simply not enough: “What we need is real demand growth, faster demand growth,” Kho, the president of Vitol Asia Pte., said in an interview in Kuala Lumpur. “Growth is there, but not fast enough.”

The problem in a nutshell: originally, oil consumption, or demand, was forecast to expand this year by about 1.3 million barrels a day, growth has been limited to about 800,000 barrels a day so far in 2017, Vitol's Kho said, adding that meanwhile U.S. output had grown 400,000-500,000 barrels a day more than expected. “If demand goes back to where it should, where it’s forecast, then it’ll help, but my gut feel tells me it is still a bit long,” he said. Vitol's dour demand outlook has been shared by the International Energy Agency itself, which trimmed its forecasts for global oil demand growth this year by about 100,000 barrels a day to 1.3 million a day as a result of weaker consumption in OECD member countries and an abrupt slowdown in economic activity in India and Russia, according to a report released last month.

As a result, the Paris-based IEA cut its estimate for India’s 2017 oil-demand growth by 11% . It's not just India: there’s also concern that consumption may slow in China, the world’s second-biggest oil user. As we reported in March, China's independent refiners or "teapots", which account for a third of the nation’s capacity, have received lower crude import quotas compared with a year earlier, prompting speculation their purchases could slow.

“The oil market is looking for growth but there’s no growth,” Vitol’s Kho said, adding that the refiners may only get approval for the same volume of imports as last year. And while U.S. gasoline consumption is expected to hit its seasonal summer peak soon, demand growth “is not there yet,” he said.

Yet, in what may be the third law of oil price (dis)information, for every bearish oil trader, there is an equally bullish oil producerm, in this case Saudi Arabia. And indeed, the world’s biggest crude exporter is quite optimistic on oil's prospects. According to Bloomberg, Saudi Arabia expects 2017 global consumption to grow at a rate close to that of 2016, Energy Minister Khalid Al-Falih said on Monday. “We look for China’s oil demand growth to match last year’s, on the back of a robust transport sector, while India’s anticipated annual economic growth of more than seven percent will continue to drive healthy growth,” he said in Kuala Lumpur.

While some fear a slowdown in Chinese oil demand, Sanford C. Bernstein & Co. doesn’t see any cause for concern. Growth in the nation’s car fleet will support gasoline demand, with increasing truck sales and air travel also helping fuel consumption, it said in a report dated May 9.

 

Saudi Arabia and Russia, the world’s largest crude producers, signaled this week they could extend production cuts into 2018, doubling down on an effort to eliminate a surplus. It was the first time they said they would consider prolonging their output reductions for longer than the six-month extension that’s widely expected to be agreed at an OPEC meeting on May 25.

* * *

And then there is shale.

“We’ve always talked about the call on OPEC, how much OPEC oil is needed to satisfy world demand,” said Nawaf Al-Sabah, chief executive officer of Kufpec, a unit of state-run Kuwait Petroleum Corp. “Now, in this new paradigm, it’s really becoming the call on shale. And the market is setting itself at the marginal cost of a shale barrel.”

As Bloomberg points out, U.S. output has jumped for 11 weeks through the end of April to 9.29 million barrels a day, the most since August 2015, Energy Information Administration data show. Furthermore, according to an EIA forecast released on Monday, US crude output for 2017 is expected to rise again, from 9.22MMbpd to 9.31MMBpd, and jump in 2018 from 9.9MMbpd to an all time high 9.96MMpbd.

That may prove optimistic.

According to a separate Bloomberg report, U.S. shale explorers are boosting drilling budgets 10 times faster than the rest of the world to harvest fields that register fat profits even with the recent drop in oil prices.

Flush with cash from a short-lived OPEC-led crude rally, North American drillers plan to lift their 2017 outlays by 32 percent to $84 billion, compared with just 3 percent for international projects, according to analysts at Barclays Plc. Much of the increase in spending is flowing into the Permian Basin, a sprawling, mile-thick accumulation of crude beneath Texas and New Mexico, where producers have been reaping double-digit returns even with oil commanding less than half what it did in 2014.

Needless to say, that’s very bad news for OPEC and non-OPEC in the ongoing, and failing, global campaign to crimp supplies and elevate prices. Wood Mackenzie Ltd. estimates that new spending will add 800,000 barrels of North American crude this year, equivalent to 44 percent of the reductions announced by the Saudi- and Russia-led group.

Drilling budgets around the world collapsed in 2016 as the worst crude market collapse in a generation erased cash flows, forcing explorers to cancel expansion projects, cut jobs and sell oil and natural gas fields to raise cash. The pain also swept across the Organization of Petroleum Exporting Countries, which in November relented by agreeing with several non-OPEC nations to curb output by 1.8 million barrels a day. So far, independent American explorers such as EOG Resources Inc. and Pioneer Natural Resources Co. are holding fast to their ambitious growth plans. Some recently finished wells in the Permian region yielded 70 percent returns at first-quarter prices, EOG Chief Executive Officer Bill Thomas told investors and analysts during a conference call on Tuesday.

But the worst news for OPEC is that a new flood of oil may be imminent: "U.S. oil production is already swelling, even though output from the new wells being drilled won’t materialize above ground for months." In other words, "in a few months" expects a whole new wave of shale oil to hit markets.

It is unclear how long the shale strategy can continue: drillers can afford to be sanguine despite oil’s recent tumble because they’ve cushioned themselves with hedges, Martin said. Hedges are financial instruments that lock in prices for future output and shield producers from volatile market movements.

“There is some price malaise creeping in,” Martin said. “But the aristocracy of the U.S. independents have insulated themselves” through hedging.

At the end of the day, however, the biggest culprit for OPEC's failed strategy may be none other than the Fed and its peer central banks, who have made access to cheap money virtually problematic, money which shale companies that were near bankruptcy a year ago, are now using to pump record amounts in hopes of stealing Saudi market share.

“The specter of American supply is real,” Roy Martin, a Wood Mackenzie research analyst in Houston, said in a telephone interview. “The level of capital budget increases really surprised us.”

If Riyadh really want the price of oil to go up, perhaps it should send a letter to Janet Yellen to make it more difficult for shale companies to get the funding they need to produce any amount of oil with virtually no capital limitations.

Finally, we go back to Vitol’s Kho, who tried to end on an optimistic note. He failed: “I am still watching the U.S. summer gasoline demand,” he said. “OPEC has said it will try and extend its output cuts beyond June. So if that happens, and the discipline is good, and if the U.S. lack of growth in demand changes into summer, then we may see oil go back to the low $50s, but the prevailing mood today is not.”

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LawsofPhysics's picture

Oh well, who needs oil anyway, it's nothing but reduced hydrocarbons and consumable calories...

What can you do with these things, do they have any real value?

The charade continues...

"Mark to fantasy" forever!!! 

or at least until we are all gazillonaires!!!!

_RRR_'s picture

you could fire up a V8 to run over some corrupt politicians, how's that for a start

cheka's picture

peak oil - one of nyc banksters' most successful scams

auricle's picture

Cars for camels. Africa is the last undeveloped continent. 

Arnold's picture

Translation:

We speculators cannot rape you any harder than we already are.
We aren't here to loose money on trades, you know.

GooseShtepping Moron's picture

Peak Oil is entirely real, unless you believe that that the earth contains an infinite amount of oil.

Offthebeach's picture

Known oil is like 200 years.  Maybe more as there is incentive to downplay oil glut.  Oil from coal might well be 500-1,000 years, easy.

 

Wrenching Away's picture

Talking out of your ass. No one can predict the market for oil or anything else even 10 years down the road now, let alone 1000 years.

Thought Processor's picture

 

 

Peak oil is real.  Peak Oil is the 'Peak Production' of oil.  We hit it, likely dead on to King Hubberts prediction between 2000-2010.  However, and this is a big however, it was prolonged artificially by fracking in north america.  Fracking however is not economically viable as the true input cost is actually greater than the output value (unless you add the 'value' of not having your economy implode by using it).  It was just a short term fix in order to buy time (note: it did).

 

Simple way to understand the fracking fiasco is that it requires more than a barrell of oil to extract a barrell of oil with most fracking operations.  No other reason to do it unless national security issues are at stake.

 

 

Offthebeach's picture

You forgot the natural gas.  All things require imputs.  One barrel oil in....most of barrel oil out and shit load of varpor hydro carbon( natural gas ) out.

Anyways, you say it's a loser.  Fine.  Others bet not.

A market, pseudo scientific "I can count every grain of sand on the beach" notwithstanding. 

The world moves forward by gamblers,  risk taking, venture.  

You can be comfortable in your rigid orthodoxy. 

Offthebeach's picture

Like I said, lots of parties, most, have incentives to short energy supplies.  You, energy companies,  note holders, enviros, gov ( same)

The world is fat with energy and it gets cheaper every decade, politics aside .

JohnGaltUk's picture

I am going to replace my 7 series with another 7 series but with a 4L this time.

MPJones's picture

Still running my old 850 as my daily transport :-). These half and three-quarters engines hold no attraction to me...

John Law Lives's picture

My 540i will be 17 years old this year, and it still runs like a top.  I see no reason not to keep this car until it is kaput.  I wouldn't get much on a trade-in as it is.

MPJones's picture

Great car from the greatest quality marque :).

John Law Lives's picture

Thanks for the reply. 

I have never driven an 850, but they look great and got good reviews.

BorisTheBlade's picture

Interestingly enough, your 17 years old will probably survive longer than most fresh-from-dealer cars. These days they are made to last until the end of warranty (and that's a big if), German cars are one big dissapointment nowadays - on top of being expensive and depreciating 30%+ after one year.

John Law Lives's picture

Thanks for the reply.

I have enjoyed this 540i.  It has been a solid car.  They can be expensive to repair, but I have been fortunate not to have any significant out-of-warranty issues.  The engine and transmission etc. have been rock steady.

NoDebt's picture

You should take a ride in my Callaway twin turbo Cadillac Escalade before you make that decision.  With gas this cheap I'm always the first one at soccer practice with my kids.

Doing everything I can to help out world oil demand.

Iconoclast421's picture

Yeah but there's growth in health care administrators. Apparently that position doesnt require a lot of energy. That is the good thing about do-nothing jobs.

LawsofPhysics's picture

Interesting, do those people need to eat? Why can't we have health care administrator robots?

RagaMuffin's picture

Hmmmmmmmm......If the airline beatings continue summer gas demand just might pick-up      /S

Dr. Engali's picture

Oh boo fucking who. Oil prices aren't high enough to screw the CONsumer the way we hope.

LawsofPhysics's picture

Fuck the CONsumer!  Give the producers access to cheap commodites and inexpensive energy!!!!!!

But I digress...

"Price discovery" in a world of useless overcompensated fucking middlemen...

good luck with that!!!

foodstampbarry's picture

Ship all the middle class jobs overseas, where all that's left are shitty 10 dollar an hour service jobs and they wonder why there is no fucking growth? Seriously?! I ain't got nothing but a high school education, and even I can see the issue. Why doesnn't anybody on CNBS ever state this glaring fact?!!' Fuck off Steve Liesman and too Stuart Varney!

Dr. Engali's picture

Uhmmm, because CNBS is owned by one of the multi-nationals who shipped the jobs overseas.

Silver Savior's picture

I used to frequent mainstream media. They crack me up so much. They are highly educated and yet are so stupid at the same time. It's like they learn all this stuff and that's great but the real world they don't know if they are on foot or horseback.

cahadjis's picture

What's not to like about less demand for oil and more reliance on alternatives? Only he is sad. I've got solars, self-sufficient, Spain's sunshine, and all coming out of his pocket. Face it mate, higher efficiency will not be undone, change your day job.

Caloot's picture

If this is the effect of shale really only being produced in the US, imagine the collapse of the desert Kings when the 95 percent of the rest of the world is opened up.   Something about trying to hold back the rising tide.

Silver Savior's picture

Welfare for desert kings!

CNONC's picture

Now, in this new paradigm, it’s really becoming the call on shale. And the market is setting itself at the marginal cost of a shale barrel.”

That is probably the most insightful and useful comment I've seen on ZH in three years.  And you're right.  Lots of shale around the world.  The GCC, and by extension, the petrodollar system, has an existential problem.  The question becomes, what happens when petrodollars no longer fund US fiscal and current account deficits?  My guess, actually, is that it is an economically minor event in the long run.  The problem comes with the delinking of the value of the dollar with the value of oil.  I believe the most economically significant aspect of the petrodollar system is to provide a reference value to the dollar, and thus all fiat currencies.  Absent that, volatility in prices, interest rates, and exchange rates becomes unavoidable.  Multilateral trade will diminish, to be replaced by bilateral trade, as the value proposition of a multilateral transaction will become impossible to calculate.  Global, vertically integrated enterprises may find it impossible to keep their supply chains viable.  That means a whole lot of "wealth" disappears, and a whole lot of debt becomes unpayable. 

CNONC's picture

And, in a related event, ZH reports:

McCain Leads Senate Mutiny As Three Republicans Join Dems To Reject Repeal Of Obama Drilling Rule

The myrmidons of the warfare state sally forth to kill oil production on Federal land, trying to protect their allies in the GCC.

centerline's picture

What?  You mean that ever increasing masses of tapped out debt slaves aren't running out to buy expensive gas-guzzling bling-bling SUVs to drive to thier fantastic new jobs as bartenders and servers?  Damn.  That just sucks. 

AlbertthePudding's picture

Sounds like a call for war again to me. Surely there is another model for keeping the world afloat.

Snaffew's picture

It seems alternative energies like solar and wind are actually putting a dent in global oil consumption.

syzygysus's picture

are you seriously talking about the solar and wind farms that require huge amounts of natural gas to provide consistent power for 60% of the day when there is no wind or sun?

 

northern vigor's picture

Snaffu may have meant the wind and solar industries that burn 280 tonne of coal to make one wind turbine, and  the huge toxic waste tailing ponds left from the rare earth mining in China. 

HyeM's picture

I agree with you.... and would only add...

 

although lower oil prices competes with alternative energy, making it less commercially viable ... lower oil prices is great because it means less money going into the pockets and war machine of the fascist, middle eastern warmonger dictators. The Saudis, Azerbaijanis, etc. etc. etc. etc. will have less money to make war.

 

lower oil prices  >  less money to middle eastern warmongers  >  drain the terrorist swamp

 

Farmerz's picture

$32  for all of last year's electric bill. Would have been negative except for their raised to $10 per month required management fee. I ll have my system paid off in less than 10 years. Not bad for just 24x327watt panels.

Money_for_Nothing's picture

10 years. Just in time to buy replacements. Also bet the laws get changed to quit subsidizing solar. Good luck. Maybe in 10 years the panels will be a commodity and all new buildings will be required to have them. Then the leading edge can move on to cold fusion.

A. Boaty's picture

Let me know when you turn on a lightbulb with cold fusion.

erkme73's picture

And by then you'll have to replace your batteries for the third time.

Nobody For President's picture

Where the fuck you getting your (dis)information on battery life for an individual solar system? I've been on full-bore solar for 14 years now, (had a smaller scale homebrew system for 20+ year before that), and am still on my second set of batteries, which are doing fine. My first set of batteries lasted 2003 to 2012. My second set is still doing fine after 5 years. Which oil industry shill provided you with the ~3year replacement figure? I figure and budget for an 8 year battery life, which equals $500/year for depreciation/replacement. The panels and monitoring/conversion to AC equipment (mine's an Outback system) are depreciated at a conservative $200 year = $700 year 'electric bill'. Add another $100/year for propane for the generator when needed to keep the batteries charged during winter low solar input (I'm at latitude 41) and we are up to $800/year = $66 a month electric bill. How does that compare with yours?

And most of you on the grid with your own house would not be using batteries anyhow, you would be feeding into the grid and running your meter backwards if your output exceeded your draw from the corporate system. My eldest son has this set up east of San Francisco bay area. His $20K system paid of in less than 6 years - $400+ summer electric bills close to zero, and neighbors coming to watch his meter run backwards - I've seen it too, kind of cool...

Nobody For President's picture

27 panels. $20 year for distilled water and 45 minutes a month for maintenance of system. Zero electric bill. System paid off.

Fuck all the ZH solar naysayers - solar works best on an individual, on site (or on house) basis, not so great on huge central solar farms with distribution through the corporate grid, who charge consumers through the ass for the energy. Of all folks, I would think the ZH crowd would get this, but most of you don't, or won't.

Central production and corporate distribution is not the path to inexpensive solar power, except on a local small village scale. lndividual (aka 'rooftop') systems are, in appropriate areas of the planet, which happens to be where most of the humans live.

CNONC's picture

Solar is not a large scale answer, but, as you demonstrate, it works on a small scale.  If you want to be self sufficient, solar is a good answer, in the right place, for the right user.  But keep up with the NEC.  We are learning a lot more every year about solar installation safety, and some of the older installations, while compliant when they were installed, should be upgraded to current NEC standards.

A. Boaty's picture

With proper insolation, Germany can get half their electricity from solar. Large solar arrays can take a lot of pressure off base load.

CNONC's picture

If you analyze electrical usage on a cumulative or average basis, solar and wind look good.  The problem is peak demand, depending on location, can be many times average demand.  Generation plants have to be sized to accomodate peak demand.  Unfortunately, plants become very inefficient when operated at low capacity.  Most coventional plants (you can really say "all" instead of most and be reasonably correct) are steam turbine generators.  There is a lag of many minutes between the call for more steam from the boilers to the turbines receiving the power to increase generation.  There is a similar, though slightly less problematic, lag when demand falls.  Solar and wind, because their output can vary without operator input, add to instability of the system.  So if you are producing electricity at the wrong time with your solar arrays or wind turbines, it can't be used.  In the end, you cannot simply take the installed capacity of a solar generation plant and subtract that from the conventional generation capacity.  Depending on the design of the system, and the willingness to lose reliability, a solar or wind generation plant may never produce more than a few percent of its theoretical capacity. 

Snaffew's picture

and the vix slumped to 9.62 this morning....no fear for robots.