Tuesday, February 7, 2017

What's Happening With Oil?

Ever since the OPEC meeting and the tie-in to Russia on oil cuts, oil spiked from $47 to $57. The market paused at that price in December 2016 to see if the deal had conviction. At the moment, it looks like all the players are cooperating except there is a new swing producer in town - US. The market is aware and the oil price is testing a decline. Let's take a closer look.
Rig Count
has crossed the magic threshold for North America(US & Canada) of 1000 or more working wells. This means that US can produce up to 10 million barrels per day, especially if shale comes back to previous levels. Dear reader, unlike mines, well sites can resume production in as little as two weeks. A new well site can produce in six months. It can take ten years to get a mine into production. With that said, let us look at the recent past US production along with global figures.
US : reached a 25 year high in 2015. By the way, we led the world in production in 2015.
World: averaged 80 plus million bbl/day in 2015. This level is 40% higher than 2008 when oil hit its all-time high of $147 per barrel.
Today, world demand is 93mbbl/day. Supply exceeds demand by one-half million per day.
Pluses and Minuses
New world discoveries are a real problem with only 2.8b on the books while present demand is 29b.
US oil inventory is approaching 500m.This is up 5% year over year(YOY) and a record amount.
US gasoline is up 1% YOY.
US distillates is up 6.9% YOY.
US demand is down 2% YOY on oil.
US demand is down 5.7% YOY in gasoline.
US demand is up 5% YOY in distillates.
China's oil production is down and demand is up. It is now a big importer of oil.
India needs more oil than China.
The Baltic Shipping Index is down 50% since the Trump win. Even though this is dry goods, less boats, less need for oil.
US demand is down and now, is an exporter.
Iran is upping its production. It could reach 4 million bbl/day, however there is new tension with the US and Trump. Iran says it will answer Trump on the 10th of this month which is the anniversary of the Iran Revolution. It turned out to be a big nothing. No shake up of the market, for now. Could only be temporarily like the oil cut agreement.
Then, there is this future aspect...
Electric Cars.
Production of this cleaner burning fuel surged over 60% in 2014 after rising 44% in 2013. Bloomberg predicted that there will be over 200 million electric cars in the world by 2035. British Petroleum sees 100 million. So, let us average it to 150m. That is still a big number and it means less fossil fuel going forward.
All in all, I see oil testing the $47 level. Iran could put a $50 floor, but long term, I see oil back at $40 a barrel.