FRACTIONAL FLOW

Fractional flow, the flow that shapes our future.

Posts Tagged ‘Brazil

World Crude Oil Supplies per July 2017

In this post I present developments in world crude oil (including condensates) supplies since January 2007 and per July 2017.

  • In this post the world crude oil (inclusive condensates) supplies is split into three entities, North America [Canada, Mexico and the US], OPEC(13) and other Non OPEC [World – {North America + OPEC(13)}] with a closer look at Brazil.
  • For OPEC(13) a closer look at developments of number of active oil rigs versus developments in the oil supplies. This is supplemented with developments in the oil supplies versus the number of active oil rigs for some selected OPEC countries.
  • Looking at figure 07 for OPEC(13) the increase in its supplies as of late 2014/early 2015 followed a period with noticeable growth in oil rigs and likely capacity expansions/modifications of oil process/treatment facilities.
    The accompanying increase in OPEC(13) supplies may simply have been rationalized from a pure business desire to recover the investments (CAPEX) from these capacity expansions.
  • Finally a closer look at developments in petroleum consumption/demand and stock changes for the Organization for Economic Cooperation and Development (OECD).
    The OECD has about half of total global petroleum consumption and a major portion of the global petroleum stocks.
  • “It took a lot of costly oil to bring down the oil price. This is the magic from lots of cheap credit.”

Data from this post is primarily from EIA Monthly Energy Review October 2017.

Figure 01: Figure 1: The stacked areas in the chart above shows changes to crude oil supplies split with North America [North America = Canada + Mexico + US], OPEC and other non OPEC [Other non OPEC = World – (OPEC + North America)] with January 2007 as a baseline and per July 2017. Developments in the oil price (Brent spot, black line) are shown against the left axis.

It was the oil companies’ rapid growth in CAPEX leveraged by cheap debt [ref US Light Tight Oil (LTO)] and expectations of a sustained higher oil price that brought about a situation where supplies started to run ahead of consumption/demand that brought the oil price down. During the run up to the oil price collapse, supplies also grew from other non OPEC (ex North America) from developments sanctioned while the oil price was high and expected to remain so.

Following the oil price collapse several of these developments had to take considerable write downs.

This coincided with increased OPEC supplies in what became widely explained as a bid from OPEC for market share.

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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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The Oil Price and EMEs growth in Credit and Petroleum Consumption since 2000

In this post I present a closer look at the credit growth for 6 Emerging Market Economies (EME) together with the developments in their and the net oil exporters petroleum consumption for the period 2000 to 2014.

The 6 EMEs are; Brazil, China, India, Indonesia, Malaysia and Thailand.

  • Where did the lion’s share of growth in global petroleum consumption end up since 2000?
  • What was the likely mechanism/vehicle that allowed for this?

This post is an update and expansion to my post “Changes in Total Global Credit Affect The Oil Price”

  • The credit growth for the EMEs was strong in absolute and relative terms (also as a percentage of GDP) since 2009. As from 2013 the EMEs credit growth slowed (decelerated).
  • The EMEs credit growth gained momentum as the big central banks lowered interest rates and started Quantitative Easings (QE), refer also figures 02 and 04.
  • As the EMEs enter debt saturation (little room left on their balance sheets {little remaining quality collateral} to take on more credit/debt) expect this to affect their consumption and their potential to pay for higher priced oil.
  • Potential for continued [global] credit growth will for some time become one of the vital factors that define the sustainable ceiling for the oil price.
  • Demand is what one can pay for. In other words, demand is monetary in nature. Credit acts as money and adds to aggregate demand.
    Credit growth also made it possible to bid up and pay for higher priced oil during the recent years.
  • If the oil price, for whatever combination of reasons, moves to a sustainable higher level, it should be expected that those who are left with limited/no access to more credit will reduce their consumption/demand for oil.

Figure 01: The stacked areas in the chart show the growth in petroleum consumption for the 6 EMEs and the net oil exporters from 2000 to 2014 [2000 has been used as a baseline]. Total growth for the 6 EMEs are shown by the black dotted line. The red dashed line shows the change in total global petroleum consumption since 2000. [These are shown versus the right axis]. The development in the oil price is shown by yellow circles connected by a grey line versus the left axis.

Figure 01: The stacked areas in the chart show the growth in petroleum consumption for the 6 EMEs and the net oil exporters from 2000 to 2014 [2000 has been used as a baseline]. Total growth for the 6 EMEs are shown by the black dotted line.
The red dashed line shows the change in total global petroleum consumption since 2000. [These are shown versus the right axis].
The development in the oil price is shown by yellow circles connected by a grey line versus the left axis.

The chart above shows several interesting developments.

  • The strong growth in petroleum consumption from the 6 EMEs and net oil exporters since 2000.
  • Early in the previous decade the OECD countries also grew their petroleum consumption as a response to central banks’ lowered interest rates that allowed for further credit expansion [kicking the can until there is no more road left].
  • A shift occurred post the Global Financial Crisis (GFC) in 2008.
    The 6 EMEs and net exporters outbid OECD (and others) for a portion of their petroleum consumption.
    (This is shown by the growth in global petroleum consumption [the red dotted line] which since 2008 did not fully meet growth in consumption from the 6 EMEs and net oil exporters.
    The 6 EMEs and the net oil exporters increased their total petroleum consumption with 17.1 Mb/d (from 26.7 Mb/d in 2000 to 43.7 Mb/d in 2014), while global consumption grew by 15.2 Mb/d to 92.1 Mb/d.
  • OECD reduced its petroleum consumption from 48.0 Mb/d (2008) to 45.1 Mb/d (2014).
    OECD countries slowed and/or reversed credit expansion (deleveraged [default is one way to deleverage]) and introduced austerity measures in a bid to manage their credit overhang.
  • The net oil exporters (countries/regions) that saw noticeable growth in their petroleum consumption in the period are; Canada, Mexico, Colombia, Ecuador, Venezuela, Azerbaijan, Kazakhstan, Norway, Russian Federation, Turkmenistan and the regions Middle East and Africa. There are other small net oil exporters like Denmark, Trinidad&Tobago which had small changes to their petroleum consumption.
  • Indonesia became a net petroleum importer as of 2003 and Malaysia as of 2011.

The net oil exporters spent some of the increased revenues from higher priced oil for social programs to improve living standards and as leverage for increased investments to sustain and/or grow oil supplies (which require energy!) for what looked like a sustained growth in demand/consumption that would support a lasting high oil price.

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Written by Rune Likvern

Saturday, 5 September, 2015 at 19:01

Changes in Total Global Credit Affect The Oil Price

In some posts on Fractional Flow I have presented some of my explorations of any relations between the oil price, changes to global total credit/debt and interest rates. My objective has been to gain and share some of my insights of how I see the economic undertows that also influences the price formation for crude 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.

In this post I present results from an analysis of developments to the annual changes in total debt in the private, non financial sector of some Advanced Economies (AE’s), and 5 Emerging Economies (EME’s) from Q1 2000 and as of Q3 2014 with data from the Bank for International Settlements (BIS in Basel, Switzerland).

The AE’s are: Euro area, Japan and the US.

The 5 EME’s are: Brazil, China, India, Indonesia and Thailand which in the post are collectively referred to as “The 5 EME’s”.

Year over year (YOY) changes in total private debt for the analyzed economies were juxtaposed with YOY changes in total petroleum consumption in these based upon data from BP Statistical Review 2014.

  • As the AE’s slowed growth in, and/or deleveraged their total private debt after the Global Financial Crisis (GFC) in 2008/2009, the EME’s continued their strong growth in total private debt and China accelerated it significantly in 2009.
  • The AE’s petroleum consumption declined noticeably as from 2007, resulting from the combination of high oil prices and tepid debt growth and/or deleveraging.
  • The EME’s remained defiant to high oil prices and continued their strong growth in petroleum consumption, which likely was made possible by strong growth in total private debt.
  • Demand remains what the consumers can pay for!

All debts counts, household, corporate, financial and public (both government and local) and exerts an influence on economic performance (GDP, Gross Domestic Product).

A low interest rate allows for growth in total debt and eases services of the growing total debt load.

Figure 01: The chart above shows the developments in the oil price [Brent spot, black line] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive. NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

Figure 01: The chart above shows the developments in the oil price [Brent spot, black line] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy heavily relies upon. The financial system is virtual and thus highly responsive.
NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

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GLOBAL CREDIT GROWTH, INTEREST RATE AND OIL PRICE – ARE THESE RELATED?

For some years my general understanding has been that the price formation for most commercial traded materials/products/items (including oil, which is paramount for all economic activities) is very much related to credit/debt growth, total debt levels and the interest rate (the price of money which also is a measure of credit risk).

In an effort to continue economic growth (to save the system and avoid the mother of all deflations) the worlds leading central banks (US Federal Reserve [FED], the most important one as the US dollar also serves as the world’s reserve currency, Bank of England [BoE] and will the European Central Bank [ECB] soon follow?) in recent years resorted to quantitive easing (QE) and lowered interest rates to almost zero to ease the burden from growing total debt loads. QE was intended to be a temporary measure.

The central banks (CB) actions appear to be a lot about preserving wealth ({inflating} assets) while there is little they can do about nature’s CAPITAL, like energy stocks (most importantly fossil fuels).

The CBs likely pursued these measures as they had few other good alternatives. It appears that the CBs policies may also have influenced the oil markets and helped shape the oil companies’ strategies to deal with a tighter supply/demand balance since 2005 by encouraging them to take on more debt and go after the more “expensive” oil.

The world has also become more complex, interconnected and continued good growth in its Gross Domestic Product (GDP) post the global financial crisis.

CBs do not have the capabilities to create cheap, abundant and lasting energy supplies. For some limited time the world’s CBs and their policies may have alleviated (and for some time continue to) some of the effects of the growth in oil/energy prices, though this was likely not their primary objective when they deployed their policies.

WHAT SUPPORTED GROWTH IN OIL DEMAND AND PRICE FORMATION?

Econ 101 refers to the law of supply and demand as the price arbitrator for raw materials, goods and services. The credit/debt will be assumed and mortgaged against promises to honor it in the future and pay interest.

One understanding of our economies is to view them as thermodynamic flows where money is the facilitator that brings energy/thermodynamic flows to and allocate these within the economies.

During the recent decades, growth in credit/debt (borrowing from the future) grew aggregate demand and to some extent negated the price growth induced from demand growth.

The recent years continued growth in credit/debt was stimulated by lowering the interest rate. By keeping interest rates low, less revenues/funds were needed to service the consequences of the growth in total debts, and thus allowed for continued deficit spending and thus support economic activities at elevated levels.

In March 2014 the Bank for International Settlements (BIS in Basel, Switzerland) published a paper titled Global liquidity: where it stands, and why it matters (pdf file, 200 kB) which presented some interesting data and observations about developments in global bank credit/debt levels.

Figure 01: The 6 panel graphic above shows global bank credit aggregates and the most important borrower regions. The chart at upper left shows that global bank credit more than doubled from 2000 to 2013. In the US [upper middle chart] the growth in bank credit slowed from around 2007 (the subprime/housing crisis) and overall credit growth was continued by increased public borrowing for deficit spending. In the Euro area [upper right chart] the total debt levels led to a slowdown in growth of bank credit post 2008 (or the Global Financial Crisis; GFC) and more recently it appears as deleveraging has started [default is one mechanism of deleveraging]. In the Euro area petroleum consumption is now  down around 13% since 2008. Asia Pacific [lower left chart] which includes China, continued a strong credit growth and thus carried on the global credit growth. Latin America [lower middle chart] which includes Brazil, continued together with Asia Pacific the strong total global credit growth. Global GDP in 2013 was estimated at above $70 trillion.

Figure 01: The 6 panel graphic above shows global bank credit aggregates and the most important borrower regions. The chart at upper left shows that global bank credit more than doubled from 2000 to 2013.
In the US [upper middle chart] the growth in bank credit slowed from around 2007 (the subprime/housing crisis) and overall credit growth was continued by increased public borrowing for deficit spending.
In the Euro area [upper right chart] the total debt levels led to a slowdown in growth of bank credit post 2008 (or the Global Financial Crisis; GFC) and more recently it appears as deleveraging has started [default is one mechanism of deleveraging]. In the Euro area petroleum consumption is now down around 13% since 2008.
Asia Pacific [lower left chart] which includes China, continued a strong credit growth and thus carried on the global credit growth.
Latin America [lower middle chart] which includes Brazil, continued together with Asia Pacific the strong total global credit growth.
Global GDP in 2013 was estimated at above $70 trillion.

Private and public debt growth through the recent decades added support for the increased oil consumption and negated the effects of higher prices caused by a tight supply/demand balance. In recent years the consumers (private sector) in many Western countries are at what appears as debt saturation, and several sovereigns are trying to carry on the overall debt growth through increased  public borrowing and deficit spending, albeit at lower levels.

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