Seeking Alpha Home| My Portfolio| Breaking News| Latest Articles| StockTalk| ALERTS| PRO Dante Caruso Contrarian, fund holdings, gold Profile| Send Message| (127 followers) The Department Of Energy Graph That Presaged The Plunge In Oil Prices And What That Graph Is Now Projecting Nov. 14, 2014 8:55 AM ET | Includes: BHI, HAL, OIH, SLB, USO Summary One graph from the U.S. EIA saves a tremendous amount of trouble anticipating future oil supply trends. According to this EIA graph, oil was at risk of a price plunge throughout 2014. The trend is now bottoming and is projected to reverse for the next 3 quarters. Investment implications of the trend reversal. The oil market has a tremendous number of moving parts on both sides of the supply and demand equation, which make price forecasting very difficult. The supply side can be categorized as supply from OPEC sources and from non-OPEC sources because OPEC harbors all spare capacity. Demand can be simplified to OECD countries and non-OECD countries for recognition that growth in oil demand is coming from developing countries. The reason that it is so futile to forecast a singular price for oil is not due to demand. Global oil demand is fairly predictable. Demand has risen by approximately 1 million barrels per day over the past 3 years. While a credit crisis can significantly reduce demand as it did in 2008, such an event would take some time to emerge. Supply, however, is subject to immediate changes that are impossible to predict, such as the total collapse of Libyan production in recent years. The nature of the oil business has been drastically changed by the boom in shale (tight) oil deposits, and advancements in hydraulic fracturing. The most obvious change has been the boom in supply of shale oil and the effect on price. A more subtle effect has been the lead time from discovery to initial production. Prior to the shale oil boom in the Bakken and Eagle Ford Shale, oil watchers were constantly greeted with news of cost overruns and project delays, like what has transpired with the massive Kashagan Field in Kazakhstan. As conventional oil projects became more complex, projections of initial production became less certain. The North American shale oil boom changed that as lead times fell from several years to several months. From an investing or trading point of view, the component of oil production that comes from shale has become very dependable, or subject to upward revisions- nearly the opposite experience of the much more geologically challenging deepwater projects. One poignant graph from the U.S. Energy Information Administration (EIA) could have saved me a lot of time the past year. Here is that graph from exactly one year ago: What the graph shows is a period of 7 consecutive quarters where growth in non-OPEC oil production exceeded or was projected to exceed the growth of global oil consumption (from the middle of 2013 through 2014). As you can see from the graph, the forecast period was a radical change from earlier years where non-OPEC oil output was not able to keep pace with demand growth. Keep in mind that the projected supply was more dependable. The world was entering a sustained period of new supply outside of OPEC that would exceed demand and the only way the market would stay balanced would be for OPEC to supply less oil. For a while, OPEC did supply less, as outages in Libya alone offset nearly half of the non-OPEC supply gains for a period of time during 2014. In August of 2014, global economic growth estimates were revised lower while Libyan crude production ramped back up to 800,000 barrels per day. Those developments were met with an apparent unwillingness of Saudi Arabia to dial back production, and the oil market suffered a huge drop that really should have happened in early 2014- and would have, had it not been for Libya and instability in Iraq. Fast forward to the present day, and here is what the EIA chart now shows: It turned out that oil supply exceeded projections from last year by more than 400,000 barrels per day, while demand was revised lower due to lower Asian and European growth. What the EIA graph now shows, is that the bulge in non-OPEC production is largely over, and it specifically forecasts demand to outstrip non-OPEC supply gains for the next 3 quarters. We can add in the other major factors to see what could happen to oil in coming months: Crude oil is currently $77 per barrels vs. $94 one year ago. At that price, rig activity may be subject to downward revisions and is unlikely to outperform estimates. In fact, the number of rigs drilling for oil has fallen 5 times in the past 7 weeks. Saudi Arabia could reduce production (OPEC meets on November 27, 2014), but is unlikely to raise production, as they are already producing oil near the highest level in decades (graph available at Princeton Energy Advisors): Libyas oil production has returned to 800,000 barrels per day. That number could be difficult to sustain or increase as many foreign contractors have fled the country. A drop in production, however, is very possible. While getting very little attention, much conventional oil production requires prices in excess of $80 per barrel, and the current price environment could significantly impact global conventional supplies in the coming year. Here is a very worthwhile article from Princeton Energy Advisors that explores this possibility. There is a possibility that nuclear negotiations with Iran lead to increased exports. The deadline for negotiations is November 24, 2014. There is also a possibility that the negotiations fail. While there are countless factors that will come into play to shape the oil price, I will be watching the EIA STEO, which is released monthly, while keeping tabs on the other listed factors that could have a significant impact. One thing is clear: from this point forward, there are a lot of possible factors that can significantly reduce oil supply, and relatively few that can cause supply to exceed forecasts. According to the EIA, which has been publishing transparent and fairly accurate data, the magnificent boom in tight oil production from Texas and North Dakota is unlikely to continue to outpace global demand, which has been marching higher every year by roughly one million barrels per day. Investment Implications: Oil prices and the ETF that tracks oil United States Oil Fund LP (NYSEARCA:USO) will likely bottom in Q4. The convergence of negative factors that hit oil in August occurred during a sustained period of bulging shale oil production shook hedge funds and institutions out of oil investments. The number of oil futures held by large speculators has declined by 190,000 since June 2014. Barring a global credit crisis on the scale of 2008, the high decline rates of shale fields will guarantee that oil drilling will not slow for long, and investors should look to the Market Vectors Oil Service ETF (NYSEARCA:OIH), or underlying companies such as Schlumberger (NYSE:SLB), Halliburton (NYSE:HAL), or Baker Hughes (NYSE:BHI) for opportunities during this temporary decline. Source: The Department Of Energy Graph That Presaged The Plunge In Oil Prices And What That Graph Is Now Projecting View the best performing commodity funds with Seeking Alpha’s new ETF Hub » See @ seekingalpha/article/2682135-the-department-of-energy-graph-that-presaged-the-plunge-in-oil-prices-and-what-that-graph-is-now-projecting
Posted on: Thu, 20 Nov 2014 22:34:03 +0000
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