FRACTIONAL FLOW

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Archive for the ‘OPEC’ Category

The Contango Spread Supports The Oil Price And Results In Strong Stock Building

As analysts and pundits keep staring into their crystal balls searching for clues to future moves in the oil price, it may be more helpful to look at some actual developments that may explain the recent strong US stock builds, developments in US total petroleum consumption and what this now may presage about future oil price movements.

In this post I present a closer look at the recent growth in US total petroleum demands split into:

  • Development in US total petroleum consumption (inclusive some selected products)
  • Rate of stock build of US commercial crude oil stocks

Then a look at developments in crude oil supplies from OPEC where several of the big oil producers in the Middle East have had strong growth in the number of oil rigs since early 2014. Recent media reports about increases in oil supplies from the biggest Middle East oil producer.

Figure 01: The chart above shows developments in the oil price (Brent spot), blue line and left hand scale [The oil price has been multiplied by 4 to fit the scaling on the left hand scale]. The thick black line shows the weekly EIA reported total inventory of US commercial crude oil stocks, left hand scale. The thin gray line plotted versus the right hand scale shows the daily changes to crude oil inventories from weekly EIA data. The thick red line plotted versus the right hand scale is a trailing 28 days moving average of changes to the crude oil inventories. Stock draw downs adds to supplies and may moderate price growth for some time. Figure 02 has zoomed in on the recent developments.

Figure 01: The chart above shows developments in the oil price (Brent spot), blue line and left hand scale [The oil price has been multiplied by 4 to fit the scaling on the left hand scale]. The thick black line shows the weekly EIA reported total inventory of US commercial crude oil stocks, left hand scale.
The thin gray line plotted versus the right hand scale shows the daily changes to crude oil inventories from weekly EIA data.
The thick red line plotted versus the right hand scale is a trailing 28 days moving average of changes to the crude oil inventories.
Stock draw downs adds to supplies and may moderate price growth for some time.
Figure 02 has zoomed in on the recent developments.

In Q1 2014 the average daily US stock build was 0.29 Mb/d and during Q1 2015 the average US daily stock build was 1.10 Mb/d.

Demand for US stock build was up 0.8 Mb/d year over year. This stronger stock build temporarily adds to (global) demand and supports the oil price.

What drives this strong stock build is the price spread between contracts for prompt/front month deliveries versus contracts for later deliveries when the futures curve is in what is referred to as contango, refer also figure 3.

The recent strong builds in US crude oil storage may give away some clues about underlying developments in consumption.

Demand = Consumption + Stock changes = Supplies

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Growth in Global Total Debt sustained a High Oil Price and delayed the Bakken “Red Queen”

The saying is that hindsight (always) provides 20/20 vision.

In this post I present a retrospective look at my prediction from 2012 published on The Oil Drum (The “Red Queen” series) where I predicted that Light Tight Oil (LTO) extraction from Bakken in North Dakota would not move much above 0.7 Mb/d.

  • Profitable drilling in Bakken for LTO extraction has been, is and will continue to be dependent on an oil price above a certain threshold, now about $68/Bbl at the wellhead (or around $80/Bbl [WTI]) on a point forward basis.
    (The profitability threshold depends on the individual well’s productivity and companies’ return requirements.)
  • Complete analysis of developments to LTO extraction should encompass the resilience of the oil companies’ balance sheets and their return requirements.

Figure 01: The chart above shows development in Light Tight Oil (LTO) extraction from January 2009 and as of August 2014 in Bakken North Dakota [green area, right hand scale]. The top black line is the price of Western Texas Intermediate (WTI), red middle line the Bakken LTO price (sweet) as published by the Director for NDIC and bottom orange line the spread between WTI and Bakken LTO wellhead all left hand scale. The spread between WTI and Bakken wellhead has widened in the recent months.

Figure 01: The chart above shows development in Light Tight Oil (LTO) extraction from January 2009 and as of August 2014 in Bakken North Dakota [green area, right hand scale]. The top black line is the price of Western Texas Intermediate (WTI), red middle line the Bakken LTO price (sweet) as published by the Director for NDIC and bottom orange line the spread between WTI and Bakken LTO wellhead all left hand scale. The spread between WTI and Bakken wellhead has widened in the recent months.

What makes extraction from source rock in Bakken attractive (as in profitable) is/was the high oil price and cheap debt (low interest rates). The Bakken formation has been known for decades and fracking is not a new technology, though it has seen and is likely to see lots of improvements.

LTO extraction in Bakken (and in other plays like Eagle Ford) happened due to a higher oil price as it involves the deployment of expensive technologies which again is at the mercy of:

  • Consumers affordability, that is their ability to continue to pay for more expensive oil
  • Changes in global total debt levels (credit expansion), like the recent years rapid credit expansion in emerging economies, primarily China.
  • Central banks’ policies, like the recent years’ expansions of their balance sheets and low interest rate policies
    • Credit/debt is a vehicle for consumers to pay (create demand) for a product/service
    • Credit/debt is also used by companies to generate supplies to meet changes to demand
    • What companies in reality do is to use expectations of future cash flows (from consumers’ abilities to take on more debt) as collateral to themselves go deeper into debt.
    • Credit/debt, thus works both sides of the supply/demand equation
  • How OPEC shapes their policies as responses to declines in the oil price
    Will OPEC establish and defend a price floor for the oil price?

I have recently and repeatedly pointed out;

  • Any forecasts of oil (and gas) demand/supplies and oil price trajectories are NOT very helpful if they do not incorporate forecasts for changes to total global credit/debt, interest rates and developments to consumers’/societies’ affordability.

Oil is a global commodity which price is determined in the global marketplace.

Added liquidity and low interest rates provided by the world’s dominant central bank, the Fed, has also played some role in the developments in LTO extraction from the Bakken formation in North America.

As numerous people repeatedly have said; “Never bet against the Fed!” to which I will add “…and China’s determination to expand credit”.

Let me be clear, I do not believe that the Fed’s policies have been aimed at supporting developments in Bakken (or other petroleum developments) this is in my opinion unintended consequences.

In Bakken two factors helped grow and sustain a high number of well additions (well manufacturing);

  • A high(er) oil price
  • Growing use of cheap external funding (primarily debt)

In the summer of 2012 I found it hard to comprehend what would sustain the oil price above $80/Bbl (WTI).

The mechanisms that supported the high oil price was well understood, what lacked was documentation from authoritative sources about the scale of the continued accommodative policies from major central banks’ (balance sheet expansions [QE] and low interest rate policies) and as important; global total credit expansion, which in recent years was driven by China and other emerging economies.

I have described more about this in my post World Crude Oil Production and the Oil Price.

 

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World Crude Oil Production and the Oil Price

In April 2012 I published this post about World Crude Oil Production and the Oil Price (in Norwegian) which was an attempt to describe the developments in the sources of crude oils (including condensates), tranches of total life cycle costs (that is [CAPEX {inclusive returns} + OPEX] per barrel  of oil) and something about the drivers for the formation of the oil price.

Rereading the post and as time passed, I learnt more and therefore thought it appropriate to revisit and update the post as it in my opinion contains some topics from what I have observed, learned and discussed that have been given poor attention and appears poorly understood.

I will continue to pound the message that oil prices are also subject to the reality of;

  • “Demand is what the consumers can pay for!”

Figure 1: The chart above shows the developments in the oil price [Brent spot] and the time of central banks’ announcements/deployments of available tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive. The chart suggests causation between FED policies and movements to the oil price.

Figure 1: The chart above shows the developments in the oil price [Brent spot] and the time of central banks’ announcements/deployments of available tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive.
The chart suggests causation between FED policies and movements to the oil price.

The four big central banks, BoE, BoJ, ECB and the Fed expanded their balance sheets with $6 – 7 Trillion following the Lehman collapse in the fall of 2008. These liquidity injections are about to end.

Since 2008 most of the advanced economies’ credit expansions originated from the central banks, the lenders of last resort. Central banks are collateral constrained.

The consensus about the oil price collapse during the recent weeks is attributed to waning global demand and growth in  supplies.

All eyes are now on OPEC.

  • Any forecasts of oil (and gas) demand/supplies and oil price trajectories are NOT very helpful if they do not incorporate forecasts for changes to total global credit/debt, interest rates and developments to consumers’/societies’ affordability.

For more than a decade, I have carefully studied the forecasts (and been involved in numerous fruitful [private] discussions) from authoritative sources like the Energy Information Administration (EIA) and the International Energy Agency (IEA) including the annual outlooks from several of the major oil companies and I did NOT find that any of these takes into consideration changes to global credit/debt [growth/deleveraging], levels of total global credit/debt and interest rates.

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The Crude Oil Price and Changes to Total Global Private Credit/Debt

This is another installment of my work in progress about credit, interest rates and the oil price. Though many of the mechanisms for some time (as in several years and in some circles) have been well understood, nothing beats having the cover of data/reports from authoritative sources.

In this post I present the observations and results from the research of the developments in some selected OECD countries and emerging economies (non OECD) in their petroleum consumption together with the relative developments in their total non financial debt since 1999.

This may put into context how emerging economies were able to grow their petroleum consumption as the oil price grew and remained high. Likewise provide some insights into some of the mechanisms at work that caused a decline in petroleum consumption for the selected OECD countries.

The selected countries presented and the world had the following changes in their total petroleum consumption between 2005 and 2013 based upon data from BP Statistical Review 2014:

OECD countries:  – 4.04 Mb/d (decline)

Emerging economies: 8.39 Mb/d (growth)

Growth in world petroleum consumption: 6.94 Mb/d

The numbers illustrate that the emerging economies’ total growth in petroleum consumption was greater than the world’s from 2005 to 2013. These emerging economies effectively bid out OECD for a portion of its consumption to meet its own growing demand.

·         How was this accomplished?

·         Were the emerging economies about to decouple from the advanced economies?

·         What caused petroleum consumption for the OECD countries to decline?

I set out to explore what could be the likely causes by looking into the relative changes in total non financial debt of these countries armed with data from the Bank for International Settlements (BIS, in Basel, Switzerland) placed together with the changes in their petroleum consumption as from the end of 1999 with data from BP Statistical Review 2014.

It turns out that changes in petroleum consumption for these countries closely follow relative changes to total private non financial debts. Then add changes in sovereign/public debt.

Demand is not what one wants, but what one can pay for.

And expectations for demand drives investments for supplies.

Credit is a vehicle which allows for demand to be pulled forward in time and to some extent negates any price growth and allows for investments to meet expected demand changes.

Credit works both sides of the demand and supply equation.

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HVA RETNING SKAL OLJEPRISEN?

I dette innlegget vil jeg dele noen av mine observasjoner av og refleksjoner for hva sannsynlig retning oljeprisen vil ta i nær fremtid.

Innenfor OECD blir nå et voksende antall forbrukere av økonomiske årsaker drevet til å redusere sitt forbruk av dyr olje. I noen tilfeller der substitusjon med andre og billigere energikilder er mulige, så skjer dette, ref også figur 10. Dette gir nå en svakere global etterspørselsvekst samtidig med at tilbudssiden bedres blant annet gjennom fortsatt vekst i utvinningen av skiferolje (tight oil) og oljesand og OPEC antas å ha noe reservekapasitet.

Figur 01: Diagrammet viser utviklingen i den nominelle oljeprisen (Brent Spot) fra januar 1990 og til tidlig juni 2013.

Figur 01: Diagrammet viser utviklingen i den nominelle oljeprisen (Brent Spot) fra januar 1990 og til tidlig juni 2013.

Figuren illustrerer også at den sterke gjeldsveksten (også) tillot vekst i oljeprisen og at gjeldsveksten nå er lavere. Samtidig har forbrukerne gradvis fått en svekket evne til å betale for dyr olje mens kostnadene for de marginale fatene er generelt voksende.

Bevegelsene i oljeprisen de siste årene kan også skape inntrykk av at oljeprisen har vært gjenstand for spekulativt press. De som tjener på en høyere oljepris er mange; oljeselskapene (både private og nasjonale) selvsagt, men også leverandører av varer og tjenester til oljeselskapene. Mindre fokus har det vært på at økte investeringer skapt av en høyere oljepris ofte resulterer i økt bruk av gjeld av oljeselskapene for å skape finansiell vekst. Leverandørene av gjeld/kreditt (banker/finansinstitusjoner) til oljeselskapene har dermed fått vekst i sitt inntektsgrunnlag til en svært lav risiko.

Selskapene bruker gjeldsvekst for å øke/holde oppe utvinningen av olje og gass og dermed det finansielle overskuddet. Veksten i de finansielle overskuddene for oljeselskapene som tillot vekst i investeringene for ny kapasitet var også drevet av privat og offentlig gjeldsvekst.

Gjeldsveksten har nå bremset og på et eller annet tidspunkt vil denne reverseres for å bringe gjeldsoverhenget ned, dette bør også ventes å få følger for oljeetterspørselen og dermed oljeprisen.

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VERDENS OLJEFORSYNING, EN OPPDATERING DESEMBER 2012

Dette innlegget er en oppdatering på utviklingen i verdens forsyning av energi i væskeform per august 2012 slik dette er rapportert av EIA. I presentasjonen er verden delt inn i fire økonomiske grupper; OECD, Russland, OPEC og resten av verden (ROW; Rest Of World).

Fortsatt mener jeg den globale forsyningen av råolje har potensial for å vokse med 1,0 – 1,5 Mb/d (Mb/d; Millioner fat per dag) gjennom 2013 drevet av responsen til en strukturelt høyere oljepris. Forsyningen er drevet av vekst i utvinningen av olje fra skifer (Bakken og Eagle Ford i USA) bitumen i Canada, tilbakevending av produksjon i Libya og potensial for vekst fra Irak. Fra 2013 vil Manifa i Saudi Arabia ha potensial til å levere 0,9 Mb/d. Inkludert i forsyningsveksten vil være en normalisering av produksjonen fra Sudan der utvinningen siste året har blitt redusert med 0,4 Mb/d.

Dette skjer mens forbruket i OECD faller med bakgrunn i svakere økonomisk aktivitet og det kommer motstridende oppfatninger om størrelsen på den videre økonomiske veksten for India og Kina.

VERDENS OLJEFORSYNING

FIG01WORLDLIQUIDSSUPPLYAUG2012

Figur 01; Diagrammet ovenfor viser utviklingen i verdens forsyning av råolje og kondensat (grønne kolonner), NGPL (Natural Gas Plant Liquids; etan, propan, butan (lys blå kolonner)), annen energi i væskeform (etanol, biodiesel etc. (røde kolonner)) og volumøkninger fra raffinering (refinery gains; gule kolonner) har utviklet seg fra januar 2001 til august 2012. I diagrammet er også tegnet inn utviklingen i oljeprisen, Brent.

Dataene fra EIA viser nå en vekst i forsyningen av råolje og kondensat og denne veksten er drevet av vekst i utvinningen av olje fra skifer, bitumen og etter hvert fra funn som krever en høy pris for å gi lønnsomhet.

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BLIR KULL BROEN INN I ENERGIFREMTIDEN?

I dette innlegget vil jeg kort vise noen inntrykk basert på data fra BP Statistical Review 2012 om utviklingen i verdens energiforbruk for årene 1965 – 2011. Etter finanskrisen i 2008 har veksten i verdens energiforbruk tatt seg kraftig opp, godt hjulpet av kraftig vekst i offentlige budsjettunderskudd.

Figur 1: Diagrammet (basert på data fra BP Statistical Review 2012) ovenfor viser utviklingen i verdens energiforbruk splittet på kilde for årene 1965 – 2011. MTOE; Millioner Tonn Olje Ekvivalenter.

Verdens energiforbruk har doblet seg de siste 35 årene, noe som tilsvarer en gjennomsnittlig årlig vekst på rundt 2 %. Å spå utviklingen fremover er vanskelig, men utviklingen i gjeldssituasjonen for noen av de største økonomiene ventes nå å påvirke den fremtidige banen for energiforbruket og dermed prisingen. Ser en nærmere på dataene så blir en del andre trender tydeligere. Read the rest of this entry »

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