What's Next For Oil: Interview With Former DOE Chief Of Staff

In this week's MacroVoices podcast, Erik Townsend and Joe McMonigle, former chief of staff at the US Department of Energy, discuss the state of the global energy market, and OPEC’s rapidly diminishing ability to control oil prices. McMonigle believes investors will be hearing more jawboning from the Saudis, OPEC's de-facto leader, over the next two weeks as they try to marshal support for extending the cartel's production-cut agreement past a March 2018 deadline.

Of course, anyone who’s been paying attention knows the cuts have done little to alleviate supply imbalances that have weighed on oil prices for years. In a report published by the International Energy Agency earlier this month, the organization notes that non-compliance among OPEC members, and non-members who also agreed to the cuts those non-members who also agreed to cut oil production, increased again in July. According to the IEA data, non-compliance among the cartel’s members rose to 25 percent in July, the highest level since the agreement was signed in January. Meanwhile, noncompliance for non-members rose to 33%.

Given that oil prices have fallen since OPEC members and non-members first agreed on the cuts last November, the Saudi's might have difficulty convincing their peers that the cuts are having an impact, other than allowing US shale producers to flourish.

OPEC will meet Nov. 30 in Vienna.

Erik: Joining me now as this week’s featured interview guest is former US Department of Energy Chief of Staff Joe McMonigle, who now heads up the energy research team at Hedgeye. Joe, I think everybody understands that the key question in today’s oil market is whether the rebalancing that OPEC production cuts were supposed to achieve is really happening or if the supply glut is actually still continuing. So let’s start with your high-level view first. Is OPEC effectively managing supply or are they really just managing market sentiment?


Joe: I think, to date, they have been managing sentiment and, of course, engaging in verbal intervention in the market. Yes, they did do this production cut deal a year ago—well, actually last November. They’re eight months into that deal now, and it’s really had not that much of an impact on the market. I think, originally, when the deal was announced, I think oil bulls really liked the idea and prices were boosted as a result. But many people, a lot of very savvy oil analysts and forecasters at banks, predicted big inventory draws in the spring that just never materialized. And, of course, the return of higher prices has incurred shale to rise—which, of course, we can get into later because It’s sort of a different phenomenon. But, just to really judge the effectiveness of the production cut deal, last Friday oil ended at—or settled at—47 and some change. It was actually a penny lower than it was a year ago.


So, just to judge—obviously, prices in the last couple days have fluctuated a little bit—but, really, if you’re looking at where prices were a year ago versus where they are today, I don’t think you can really say that the production cut deal has had a lot of influence or has been very effective. And I think as a result the markets started out really impressed, and I think they’ve been pretty disappointed as we’re into month eight now, almost nine months of the deal.”

In the coming works, McMonigle said he expects "two competing narratives" to emerge in the oil market. The first, advanced by the Saudis, will be news of large export cuts, particularly to the US. The other will be the story of rising shale production.

Erik: OPEC has another meeting coming up on November 30th. And, as we all know, they’re in the habit of using the periods leading up to these meetings to jawbone the market with their various propaganda announcements. So, there’s been talk about the production cuts maybe being extended, or even increased, at this meeting. There’ve also been rumors about maybe taking exempt countries that didn’t participate in the cuts and making them not exempt next time around.


So, what do you see actually happening on November 30th? And how do you think the propaganda campaign is going to play out between now and then?


Joe: I think you’re totally right; jawboning is really part of the OPEC playbook. And I think you’re going to see it in the next two weeks now—even before August is over—I think two competing narratives. One, you’re going to start seeing from the Saudis announcements or leaks about big cuts in crude exports, particularly to the US. And they sort of signaled that they were going to do that in July. I certainly expect them to have done it. Of course, a lot of it has to do with lower demand from China as well. But they will show some big cuts, I think, in crude exports. And then juxtapose that with, I think, what you’re going to see from the US—which we’ve seen really, I think, throughout the summer—and that’s really rising US production—and a lot of other forecasts from banks and other oil analysts about rising US production. And I think Barclay’s came out with a forecast report earlier this week or late last week that had oil going to ten-and- a-half million barrels a day by the end of 2018.


So, I think you’re going to start seeing more of that, and I think that’s really making it difficult for OPEC to regain the narrative about the production cut deal. And I think they badly want to try to get that back. In terms of the next meeting, already, yesterday, you had the Kuwait oil minister say that they’re going to make a decision to consider whether to extend the production cut deal or to basically end it. Unfortunately, neither of those scenarios is really what the market wants to hear. I think the market wants to hear that there’s going to be deeper cuts, and that’s really not been on the table. I think there was some potential anticipation of that, potentially at the last OPEC meeting. We thought there really Wasn’t a chance of that happening. We wrote a note for clients that basically said—“longer not deeper” was the title of our note.


I think at the very least you’re looking at another extension. Even though it’s extended into the end of first quarter 2018, I think they will probably want to signal at that November meeting that they will extend. I think that’s at a minimum. However, I would not preclude, potentially, more drastic action at that meeting. But I think it’s too early to tell. I think we have to really see where the market is in late October and early November.


And I think the main reason for that is really the Aramco IPO coming up. And I think it’s just—we’re going to talk about that later I think—but I think that’s really, it’s a central focus of the Saudi Arabian government, of their economic reforms, so they have a lot riding on it. And, therefore, I think there’s the potential that there could be some unilateral Saudi action of deeper cuts.


So that’s something I now put in the realm of possibility as I look at the different options coming up at the November 30th meeting.”

While inventories data released in recent weeks have shown large drawdowns in the US, McMonigle said any declines have been more than offset by climbing shale production.

"Erik: I want to come back to the Aramco IPO in a few minutes, but let’s start with touching on the official US data that comes from your former employer, the Department of Energy.


It used to be pretty easy to read these reports, but lately we’re kind of getting conflicting data. There were quite a few much bigger than expected drawdowns in crude oil inventory in recent weeks, although this week it appears to be much more in line with inventory, around a 3 million barrel drawdown, which is for this time of year pretty normal.


Those big drawdowns would have been very bullish. But then we also see that there’s been steadily increasing domestic production in these Wednesday reports. That would be a bearish sign. But then on Fridays we get the rig count, which looks like it’s finally starting to level off a little bit. So that would tend to go the other way.


When you net all these things together, what do you see in the data? Are we looking at a bona fide rebalancing of the market that’s actually occurring? Or is there still a production glut?


Joe: I guess I side on the production glut side. I think—certainly there’s been some drawdowns, and I think that’s positive news. It’s hard—it’s impossible to say it’s not positive news, although I think most observers thought the drawdowns would occur sooner and they’d be even greater than they are. But a sustained several weeks now of drawdowns, I think has been positive. As you point out, the signals, however, about rising US production to really record levels, and the resiliency of US shale, I think is really a big counterweight to these inventory draws.


Now we’re also entering a phase here where the end of summer, the high demand season, is going to be switching over. And there’s going to be refinery maintenance, and—so I think a lot of the contributing factors, in terms of gasoline and other product inventories, are probably going to start stalling out. And so I think you’re going to see the market struggle here in the fall, even with further draws.


And, of course, crude exports from the US, which now are allowed as a result of lifting the crude export ban in 2016—I think, first of all, no one really thought, until prices really recovered to big levels, that there would be significant exports. But, again, the market has really been surprised, I think, about very strong crude exports. And of course that’s affecting the drawdown numbers as well.


So I think it’s a much more complicated data array to consider now, as we go into the fall. And I think—definitely you put your finger on it—the US production number, I think, is the big complicating factor in what would otherwise be very bullish news."

The former DoE chief also had this interesting detour into the petrodollar system:

Erik: A lot of people think the reason that the US dollar has remained the world's reserve currency, 45 years after the Bretton Woods system collapsed in 1971, is the so-called petrodollar system in which Middle East oil producers price their oil in US dollars regardless of who it's being sold to. And many of those nations also reinvest their profits in US Treasury Bonds.  But recently we're seeing pressure from Russia and China to stop transacting in dollars. Iran, in particular, seems to have come to favor Euros over dollars for its oil exports. So do you think the petrodollar system—or even the US dollar's hegemony as the global reserve currency—is at risk in the longer term in light of these developments? And what do these changes mean for the price of oil as you look ahead?  
Joe: First of all, I don't profess to be an expert on currencies and its impact on oil prices. But certainly, historically, there's been an inverse relationship between the dollar and oil prices. I do think the supply glut has kind of interfered a bit with that relationship. And it hasn't necessarily worked as clockwork as it has in the past. I'm not sure the moves by China and Russia are really going to have that much of an impact, or any impact at all. So I do think the dollar really remains the preferred currency, not just in oil but in commodities in general. 
I will tell you an interesting story from my time at DOE. When oil prices really surged to $100 levels, the Saudis—and in particular Minister Al-Naimi, at the time the oil minister of Saudi Arabia—really talked out loud about potentially changing the currency for oil prices from dollars to Euros, just so that they could lower those skyrocketing prices they felt were impacting demand and having a greater impact on markets than it probably should. So, certainly I think market participants are looking more at currencies right now. But I don't really put much stock in the moves—or the noise, I guess I would characterize it—from Russia and China.
This is just a modest selection of of the items discussed on the interview which also includes:
  • Is the oil supply glut rebalancing?
  • Is OPEC just jawboning the market?
  • Import data impacting oil inventories
  • Outlook for U.S. oil production
  • Update on Venezuelan geopolitics
  • What can go wrong with Iran?
  • Is the Petrodollar system at risk?
  • Is the Saudi Aramco IPO going to happen?
  • Is the term structure signaling bullish prices

Listen to the rest of the interview below:



Allen_H Sat, 08/26/2017 - 18:50 Permalink

Is he going to try explain oil/petrol/gas is NOT a distilled spirit, and is NOT some dinosaur bones jelly from my past mud ancestors?Never mind the trucks driving in our little humble town every day with graphics displaying they turn bio/veg to gas every day!I have also watched a few gas documentaries from the 50-70s, quite revealing, as well as a laugh, so fucking embarrassing!Research and question people!!!Just think about it before you comment to me!Once you realize the fraud, it will make you mad as hell!!!

MrNoItAll Sat, 08/26/2017 - 18:58 Permalink

"...allowing US shale producers to flourish." Yeah, right. "Flourish", as in billions of dollars in debt, never even came close to turning a profit as an industry, negative cash flow from start to present, and wholly dependent on massive injections of newly minted "digi-bucks" to keep the whole charade going. The shale "miracle" has been nothing but a covert JOBS program since the beginning, intended to keep the illusion of "all is well" alive and viable and keep (most of) the energy sector on the payroll. The oil industry is dying a slow agonizing death, and guess who's going down with it.

sinbad2 Sat, 08/26/2017 - 19:02 Permalink

America is obsessed with raising oil prices, why?Most of the world is glad that oil prices are low.America preaches competition and free trade, but is always trying to create cartels to fix prices.The price of oil is what it is, live with it snowflakes.

DavidFL Sat, 08/26/2017 - 19:50 Permalink

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This Shy Girl was totally worthless - Let me paraphrase - The market may go up; or it may go down; anything can happen! Wow Thanks that was very insightful!

jimmy12345 Sat, 08/26/2017 - 22:32 Permalink

fossil fuels are in trouble.  Electric vehicles, solar and battery storage get better year by year.  It doesn't take a genius to figure out that EV's and renewables will be cheaper than fossil fuels very soon.

Sapere aude Sun, 08/27/2017 - 10:09 Permalink

Who would expect anything other than the comments from an employee of the DOE!!!Complete and utter garbage.If you falsify the production figures of oil, bankroll big oil companies by buying up their bonds as they can't even service the interest on their shale debts, you will get a distorted view of the oil market.The chickens are coming home to roost now as more and more analysts and more and more people realise what at utter load of tripe the idea of an oil glut actually was...It was all contrived and the only reason for the push to renewables and EV's at breakneck pace and the adoption of 'climate change' in the last few years, when previously the US didn't is because the DOE  and the U.S. government know full well there will NOT be enough oil to go round for the future! SIMPLES.IF it was such a glut, you would not see the attempts at regime change in Venezuala to get access to the oil reserves. You wouldn't have seen the agreement with Iran to let them sell oil and you wouldn't see the bombings in Yemen or the panic to get Libya sorted to get their oil...but it makes no difference as even with uneconomic ponzi shale, even the most seasoned government stoolpigeon realises its game over, as no one belives the story of oil gluts any more. About as reliable as suggesting gold and silver are not subject to manipulation. 

francis scott … Sapere aude Mon, 08/28/2017 - 02:39 Permalink

My feelings exactly. If the world suspected how little oil there was left and that the world's militaries had dibs on it,you can imagine what chaos governments would have to deal with.  It's so much easier to tella couple of white lies.  Maybe even more than a couple.  Maybe a lot. Although the chaos from terrorismthat's been ramping up since 911 and the Iraqi War isn'tsmall potatoes any more.   The chaos stemming from terrorism we are experiencing today doesn't compareto real, honest-to-goodness chaos that we would be experiencing if running out ofcrude oil were accepted as a fait accompli. It would be akin to Trump announcing that a Giant Meteor was going to strike the Earthon Halloween. Or the white walkers had breached a gap in the wall.

In reply to by Sapere aude

Sapere aude Sun, 08/27/2017 - 10:29 Permalink

Jimmy. if you have brain cells start using them.Did you read the report on Tesla, just on the battery alone...equivalent to 8.2 years driving diesel!It doesn't take a genius. Well perhaps it does, because you certainly don't get it.EV's will not even dent the market. Governments are going bust even subsidising people to buy them, let alone the billions of dollars in subsidy for battery storage.You see the big problem is not the advances, its physics!At each stage from gaining the resources, creating the vehicles, the batteries, the solar panels, and then the INCREASED panels necessary its a fantastic amount of money.Its even questionable whether the toxic production of lithium carbonate could even be produced quick enough for even a small percentage of vehicles being EV's.On top of that we have the tax black hole, caused through massive subsidy to Tesla etc., on the one hand and the massive tax loss on hydrocarbons on the other.The comments about cheaper than hydrocarbons are about as accurate as how cheap they can produce shale....they talk the talk at $20....but they are all on the way to going bust at $50!Then there is the inefficiency of EV's.Now those who have already got PV's, and all PV's in use, already have that electricity accounted for. it's not waiting for a new use, or for charging new EV cars? That will require additional PV's.Now how many people want to drive their car at night, but charge it in the day! So then we have the next problem.In every transition in electricity productiion and transport there are energy losses, the more transitions, the more losses.So for all these new EV's it will be a strain on the grid, where the energy might be produced from coal, gas etc. etc.Creating new PV's again will cost money, but even then it won't service the needs of charging the EV in the night.Existing PV's have got inverters, but not bidirectional inverters, so that's a problem as if you want to put it a Powerwall it has to be via a bidirectional inverter, so a new inverter is required.At stage is an additional cost, but also an additional loss in effectiveness. Solar PV on grid, electricity is inverted once to be fed to grid, from grid it might need to go through transfomers, before you draw power back from the grid, to charge at night! So there's no benefit there.If you want to get a battery, you then have to double your PV panels, as your energy is already accounted for isn't it?Cost of doubling the panels, cost of bidirectional inverter. So now you are producing more electricity in the day, it goes through to charge up the battery, so another energy loss, and at night it discharges from the battery, inverted or transformed again to charge the car...so even more energy losses, and even more capital costs.Then of course you don't know how long the batteries will really last, you might have a guarantee, but that's worth nothing if a company goes bust, and with the amount of money being thrown at Tesla nothing is impossible.Then you have to wonder whether if EV's are being rolled out, you would ever be able to replace the battery, as the demand would be to produce new vehicles, not replace batteries on old ones....so effectively your car and its battery are obsolete and worthless.Then we have something they've only just realised in the UK. Most customers do not want to have a car on charge for hours and hours, and in the UK it was realised that if the car is on charge the average residential unit will not even be able to boil a kettle at the same time, and more importantly the main fuses would need changing and customers have to get the utility companies to do that.Then it was realised that the extra load would mean more resistance losses, and on residential units, the higher load on small cables would result in heat being produced and the potential for serious fires!If you don't think the EV's were out of desperation, then perhaps you should think again.The US JOEreport years ago was a result of knowing that there would not be enough oil, so instead of telling everyone the truth we have this silly propaganda, on fusion tomorrow, EV's and renewables being the answer to everything, and the glut that isn't, just to keep oil prices low for the U.S., and even shale operators bankrolled by the FED buying up their junk bonds with no chance of repayment to produce loss making oil along with the copious bits of oil contract on paper, just to keep it low for the U.S. to buy, hoping in the meantime Venezuala falls, and US companies will be invited back in there with their massive oil reserves.