Sunday, September 4, 2016

Oil price speculation

Oil production peaked in the U.S. at 9.6 million barrels per day in May 2015 according to the EIA. In May 2016, we wrote that U.S. production had fallen by around 900,000 per day.  Well, here is a bit more precision: Feb 2016 oil production was 9.2 million barrels or a 4% decline over 7 months. Between then and end of August production has fallen by another 740,000 per day to 8.4 million barrels per day. That is a decline rate of 8% over the last 7 months. Projecting the decline rate to accelerate to 12% (my guess) over the next 7 months, that would mean by Dec 2016 the U.S. would produce 7.8 million barrels a day, a bit below my earlier rough guestimate of 8 million barrels.  That is a total decline of 1.7 million barrels.

Yes OPEC countries have produced a bit more but  non-U.S. production decline was in May estimated at yet another 900,000 barrels as posted on this blog. Suppose, the decline was not more severe, then we're talking of a supply cut of 2.6 million barrels which is more than the original estimate of 2 million barrels of oversupply. Also, worldwide demand was estimated to increase by around a million barrels per day per year and over the entire period of 'over supply' by 1.5 million barrels.

Now you do the math!  Oversupply was 2 million minus increased demand of 1.5 million barrels and minus 2.6 million barrels world wide oil production decline. Add to that the fact that EIA estimates are typically 2 or 3 months behind and we must already be having a production shortage!

Oh, and the so-called storage levels reported diligently in the U.S. are distorted by the inclusion of overseas imports and fluctuations in refinery production/demand.  Remember the 'big gasoline build up' a couple of weeks ago?  Short time blobs well within the margin of error of our guesstimate.

So why the current low oil prices?  Remember that for every real barrel of oil there are possibly hundreds of derivative owners, just like reported for gold. So maybe these little facts have not yet penetrated the skulls of oil price speculators or maybe there are a lot of traders still on their summer vacation.

In the meantime prices seem to rise and fall with the odds of reaching an Russia/Opec production cap. Well...  there is a lot of noise and psychology going on around the oil price. But do not be surprised if this market suddenly wakes up and declares a supply shortage. After all, these traders feast on price volatility. The next move of oil maybe significantly up.  My guess of $60 - $70 dollar oil by year end still stands.

Natural gas prices seem to turn the corner as well. With a 'normal winter', prices could double.  So, be forewarned. We may get another up-leg in oil and gas prices soon.  But then... like everyone else, I am just speculating.  Am I?

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