FRACTIONAL FLOW

Fractional flow, the flow that shapes our future.

Posts Tagged ‘backwardation

The Oil Price – Some (Mar-16) Observations and Thoughts

In this post I present some selected parameters I monitor which may help understand near term (2-3 years) oil price movements and levels.

It has been my understanding for some time that the formulations of fiscal and monetary policies also affects the commodities markets. Changes to total global debt has and will continue to affect consumers’/societies’ affordability and thus also the price formation of oil.

I have earlier asserted;

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.

  • The permanence of the global supply overhang could be prolonged if consumption/demand developments soften/weakens and it is not possible to rule out a near term decline.
  • Recent demand/consumption data for total US petroleum products supplied show signs of saturation which provides headwinds for any upwards movements in the oil price.
  • While prices were high many oil companies went deeper into debt in a bid to increase production of costlier oil. Many responded to the price collapse with attempts to sustain/grow production in efforts to moderate cash flow declines and thus ease debt service.
  • If the forward [futures] curve moves from a present weak contango (ref also figure 02) to backwardation, this would erode support for the oil price.
  • Some suggest that growth from India will take over as China’s growth slows.
    Looking at the data from the Bank for International Settlements (BIS) there is nothing there that now suggests India (refer also figure 05) has started to accelerate its debt expansion. The Indian Rupee has depreciated versus the US dollar, thus offsetting some of the stimulative consumption effects from a lower oil price.

The recent weeks oil price volatility has likely been influenced by several factors like short squeezes, rumors and fluid sentiments.

Near term factors that likely will move the oil price higher.

  • Continued growth in debt primarily in China and the US. {This will go on until it cannot!}
  • Another round with concerted efforts of the major central banks with lower interest rates and quantitative easing.

And/or

  • A tightening in the global oil demand/supply balance from whatever reasons.

I also believe that D E M A N D (consumption) developments now are more important than widely recognized and that demand/consumption developments will play a major factor in as from when oil prices will regain support to move to a sustainable higher level.

I now hold it 90% probable that the oil price will enter a new leg down, and that the low in January 2016 could be taken out.

Recently the total US petroleum demand growth had two components

  1. Growth in consumption, mainly driven by the collapse of the oil price
  2. Noticeable growth in petroleum stocks (primarily crude oil) since late 2014 driven by a favorable contango.

The combined effects from these grew annualized US petroleum demand by 1.3 Mb/d relative to January 2014 (ref also figure 01). US consumption growth has now stalled, which may suggest saturation from the lower oil price is about to be reached.

Figure 01: The chart above shows development in annualized [52 weeks moving averages] US total petroleum consumption [blue line] and storage build [red line] both rh scale. The black line, lh scale, shows development in the oil price (WTI). Consumption and storage developments are relative to Janaury 2014 (baseline). NOTE, changes in consumption and stocks are stacked, thus the red line also shows total annualized changes in demand.

Figure 01: The chart above shows development in annualized [52 weeks moving averages] US total petroleum consumption [blue line] and storage build [red line] both rh scale. The black line, lh scale, shows development in the oil price (WTI). Consumption and storage developments are relative to Janaury 2014 (baseline).
NOTE, changes in consumption and stocks are stacked, thus the red line also shows total annualized changes in demand.

In the last 6 months total US petroleum consumption developments have stalled and there are some relative changes amongst the products (ref below).

A weakened contango (ref also figure 02) will likely reduce demand for storage.

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CENTRAL BANKS’ BALANCE SHEETS, INTEREST RATES AND THE OIL PRICE

In this post I present a more detailed look at developments in central banks’ balance sheets, interest rates and the oil price since mid 2006 and as of recently.

Paper and digital money are human inventions. Most people truly believe it is money that powers the society and their lives because they have never had reason to think otherwise. Money does not create energy, but it allows for faster extraction from stocks of energy (like fossil fuels) and influences consumers’ affordability of energy.

It is humans’ ability to use external energy that gives humans leverage over other animals. The financial system in general does not recognize oil for what it is, it treats it like another commodity.
We (the aggregate human hive) moved to use more financial debts as a way of pulling resources for consumption (like oil) forward in time when Limits To Growth (LTG) was written. In recent years global credit/debt creation went exponential. The workings of financial debts (created “ex nihilo”) was not included in LTG and the effects of debts are rarely recognized when Gross Domestic Product (GDP) is estimated and its future trajectory projected.

This post takes a closer look at the question:
•   “Could the cumulative effects of the strong growth in oil prices starting back in 2004, which signaled a tighter oil supply/demand balance, upon working their way through the economies, have contributed to forcing the central banks’ to deploy their tools of lower interest rates and growing their balance sheets – measures which have mitigated some of the effects of higher priced oil?”
It is recommended to read this post as an extension to my post “Global Credit growth, Interest Rate and Oil Price – are these related?” where I showed that apparently something fundamentally changed in previous mid decade.

Data from the big western central banks, US Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BoE) and Bank of Japan (BoJ) have been lifted from the article “Chart Of The Day: The Fed (And Friends) $10 Trillion Visible Hand” which recently was published by Tyler Durden at ZeroHedge.

Figure 1: The chart above is a composite of two charts. The bottom chart shows the developments for the total central banks’ assets on the balance sheets and the interest rate for Federal Reserve [Fed], European Central Bank [ECB], Bank of England [BoE] and Bank of Japan [BoJ]. Developments in total central banks’ assets in US$ Trillion are shown by the green line and plotted versus the outer right hand scale.  Developments in the interest rate (%) are shown by the dark blue line line and plotted versus the inner right hand scale.  On top of the chart and with synchronized time axes is overlaid the development in the oil price (US$/Bbl, Brent spot), red line and plotted versus the left hand scale.

Figure 1: The chart above is a composite of two charts. The bottom chart shows the developments for the total central banks’ assets on the balance sheets and the interest rate for Federal Reserve [Fed], European Central Bank [ECB], Bank of England [BoE] and Bank of Japan [BoJ].
Developments in total central banks’ assets in US$ Trillion are shown by the green line and plotted versus the outer right hand scale.
Developments in the interest rate (%) are shown by the dark blue line line and plotted versus the inner right hand scale.
On top of the chart and with synchronized time axis is overlaid the development in the oil price (US$/Bbl, Brent spot), red line and plotted versus the left hand scale.

Since the start of the global financial crisis (GFC) in 2008 the western central banks (Fed, ECB, BoE and BoJ) have grown their total assets above $10 Trillion and added around $7 Trillion to their balance sheets in the last 7 years.

The overlay with the developments in the oil price on the chart with central banks’ (CBs) balance sheets and interest rate (ref also figure 1), creates the impression that massive CBs liquidity injections and considerable cuts to the interest rate renewed the support for the oil price after it collapsed from its high in the summer of 2008.

The oil price has remained fairly stable since 2011 (around US$110/Bbl) as the western central banks continued to expand their balance sheets at an annual average rate of around US$1 Trillion and kept interest rates low. Then add the expansive credit/debt creation of other big economies, like Brazil and China, during this same period.

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VERDENS RÅOLJEPRODUKSJON OG OLJEPRIS

I Norge synes det nå som at det er en størrelse som får mer oppmerksomhet enn formkurvene til tallene i Lotto (eller andre pengespill) og det er oljeprisen. Et eller annet sted i den norske folkesjelen har en eller annen form av visshet krøpet inn om at betydningen av nasjonens ve og vel er i et, om noe opakt, så definitivt uadskillelig skjebnefelleskap med den internasjonale oljeprisen.

Figur 1: Figuren viser utviklingen i oljeprisen (Brent spot) fra 1. januar 1995 til 4. april 2012. I figuren er også tegnet inn utviklingen av det løpende snittet for 1, 2, 3, 4 og 5 år.

Figuren ovenfor viser bare hva som de fleste forbrukerne etter hvert har fått føling med. Prisøkningen alene burde påkalle refleksjoner om hva dette kan innevarsle om fremtiden. Dette i den grad folk flest er bevisst at fremtiden er et sted der de skal tilbringe resten av livet.

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Written by Rune Likvern

Saturday, 7 April, 2012 at 15:14

Posted in IEA

Tagged with , , , ,

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