OPEC Outlook Is Smoke and Mirrors

Jim Brown
 
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The OPEC Secretary General said the market should not panic on oil prices but OPEC slashed expectations for the future.

OPEC is the supplier of 40% of the world's crude oil. Because of the shale energy boom in the U.S. that is spreading to other countries, OPEC said the demand for OPEC crude could decline to 28.2 mbpd in 2017. That is a 14-year low. That is also -600,000 bpd less than the same forecast last November. OPEC produced nearly 30.974 mbpd last month and the most since August 2013 so that number is -2.8 mbpd less than current levels. However, demand fluctuates month to month and it is seasonal. Their recent forecast is an annual average. OPEC has an official production quota of 30.0 mbpd but they have exceeded that level in all but five months since January 2012.

They lowered the forecasts for every year through 2035 except for 2016, which is expected to be slightly higher. For instance OPEC reduced its demand forecast from 34.8 mbpd to 33.0 mbpd for 2030. I always laugh to myself when they publish these numbers. They have no clue what is going to transpire over the next 16 years in relation to oil demand. We may all be driving electric cars by then.

OPEC raised their expectations for output from North America by 2018 to 19.1 mbpd, an increase of 2.2 mbpd, and initiated a 2019 forecast for 19.4 mbpd. They expect shale production to rise from the current 3.4 mbpd to 4.4 mbpd by 2019. That is strange since the U.S. EIA believes shale production will peak in 2017.

They expect demand to rise to 96.0 mbpd by 2019, up from the 92.3 mbpd predicted for 2015. The long term demand forecast rises about 1.0 mbpd per year.

OPEC expects prices to remain at $110 per barrel for the rest of the decade, rising to $124 by 2025 and $177 by 2040. What were they smoking to come up with those numbers since the price on Friday was $78.11 for the OPEC reference price compared to $101.51 year to date?

Brent prices declined for the seventh weekly drop and the longest streak since November 2001.

OPEC's secretary said "don't panic over prices" but multiple U.S. E&P companies have already announced cutbacks. Those inclued Exxon, Conoco, Apache, Shell and Continental to name a few.

One thing in our favor is the rapidly declining price of gasoline. The average price shrank to $2.94 on Sunday according to Lundberg Survey Inc. That is the lowest since December 3rd 2010 and -78 cents below the May 2nd peak of $3.72.

U.S. production rose to 8.972 mbpd and the most since 1983. Production has risen +66% in the last five years according to the EIA. Refineries processed 15.5 mbpd for the prior week and the highest level since 2003.

Lower prices means higher demand. Goldman Sachs said a couple weeks ago the price decline could add another 500,000 bpd to demand. When gasoline is cheaper consumers buy more and drive more. If prices stay this low through the holiday season I would expect that demand gain to be closer to 1.0 mbpd. Driving to grandma's house for Thanksgiving or Aunt Mary's for Christmas is suddenly a lot cheaper.

Where price declines in gasoline are benefitting the economy the sharp spike in gas prices will do the opposite. The term Polar Vortex came back into the headlines after Rutgers University warned that snow coverage in the tundra north of Moscow was the third largest on record for this time of year. Roughly 900,000 square miles are covered compared to the 50year average of 573,000. Nine of the top ten coldest winters on record have resulted from high levels of snow coverage in Siberia. Without bare ground to soak up the sun and radiate the warmth back into the atmosphere the cold air remains cold longer.

The U.S. is expected to see temperatures 20-40 degrees colder than normal over the next two weeks as a result of super typhoon Nuri, which is headed for Alaska from the western Pacific. This was the largest typhoon in 35 years. The massive storm has been downgraded but it will still impact the jet stream and cause the cold arctic air to be pushed down over the U.S. Midwest and Northeast. Natural gas prices shot up from a 52-week low of $3.54 to a 5-month high of $4.49 in only nine days.

Oil Inventories

The spike in crude inventories slowed last week with a gain of only 500,000 barrels. Crude imports declined from 7.1 mbpd to 6.68 mbpd, a drop of -420,000 bpd. That is a pretty steep decline and the lowest level in more than 8 weeks. U.S. production reached another 31 year high at 8.972 mbpd.

Cushing inventories declined slightly to 20.8 million barrels. Refinery utilization rose +2% to indicating they were anxious to end the maintenance period and get back to refining products while oil prices are low. Refiners should be making a killing on gasoline and diesel today.

Refined products supplied to the market averaged 19.61 mbpd and just below the high of 21.4 mbpd the prior week. Demand is strong.

Gasoline inventories fell for the fourth consecutive week with a drop of -1.4 million barrels. Gasoline demand rose to 9.16 mbpd and the highest level since Labor Day. Cheaper gasoline is causing stronger demand.

Distillate inventories declined -700,000 barrels and demand was lackluster at 3.48 mbpd. Of course that came the week after a multi-month high in demand of 3.93 mbpd the prior week so some inventory shuffling was probably involved.

In the graphic below green represents a recent high and yellow a recent low.


Propane inventories declined -0.14 million barrels to 80.13 million. Demand decreased slightly from 1.52 mbpd to 1.27 mbpd. The week of Oct 17th was the peak inventory level for the season.

Natural gas inventories rose +91 Bcf to 3,571 bcf. Inventories are still -6.8% below the five year average at 3,832 Bcf. This was the last week in the injection season. We are still about 300 Bcf below where we need to be as we begin the heating season.

Temperatures for the next two weeks are predicted to be 20-40 degrees below normal so gas consumption should spike significantly.

The blue line in the chart below shows the current inventory relative to the five year average.


Market

The market ended the week at its highs again with the Nasdaq and Russell still struggling to make any forward progress. Events overseas this weekend have put a positive spin on the futures but it is still a coin toss for direction this week.

Jim Brown

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