A weekly look at what occurred in the oil markets of the U.S. and the world this past week.
—Each month, there are three agencies that release their views on supply and demand: the Energy Information Administration (EIA) of the U.S. Department of Energy, in its Short Term Energy Outlook (STEO); the International Energy Agency (IEA), which is a 40+ year group founded by large oil consuming nations; and OPEC itself.
Their formula is all pretty much the same: estimate global demand, estimate what non-OPEC countries are going to produce, estimate what OPEC nations are going to produce in the form of natural gas liquids (which are counted as “oil” barrels though they are more accurately referred to as petroleum), and after all that calculate what OPEC needs to produce to keep the market balanced, a number known as the “call,” as in the call on OPEC crude.
The key takeaway from the reports that were released this month is that the agencies feel confident that OPEC will be able to keep oil markets from collapsing under the weight of growing non-OPEC output, with the U.S. river of crude heading that growth. Or as a Bloomberg headline said: “The Big Oil Agencies’ Verdict on OPEC+ Pact: Glut Averted.” The reference to OPEC+ is what came out of the December meeting, when OPEC plus a group of non-OPEC nations mostly aligned with Russia agreed to cut 1.2 million barrels per day (b/d) out of supply in 2019.
The EIA’s STEO actually does build a model that forecasts OPEC oil production. OPEC and the IEA do not, apparently assuming that trying to discern OPEC’s activities in advance is a fool’s game.
To start the comparison, note that OPEC in December produced anywhere from about 32.1 million b/d to 32.6 million b/d, depending on who is doing the estimating. But the IEA report released in recent days says the call for the first quarter of this year is 30.7 million b/d. It rises as high as 31.6 million b/d in the third quarter and averages 31.3 million b/d for the year.
That gap between the December output – when OPEC already slashed its output anywhere from 500,000 b/d to 700,000 b/d, again depending on who is doing the estimating – is the amount of further reductions needed to stop excessive inventory builds. And the EIA, at least, is a believer. Its forecasts see OPEC output on either side of 30.8 million b/d for most of 2019.
But there’s a caveat here: the EIA estimates don’t include Qatar as an OPEC member (the country announced late last year that it was leaving the group). That’s a swing of about 600,000 b/d. The IEA, for example, is still counting Qatari output as an OPEC flow, but intends to drop that in the first months of this year. Still, even if OPEC output in December was on the high end of the range, up around 32.6 million b/d and you take 600,000 b/d off it, you’re down to 32 million b/d. If the call is 30.7 million b/d in the first quarter, that’s still a significant gap. But the call rises significantly over the year as demand increases about 1.5 million b/d. If the EIA is right and Qatar-less OPEC output drops to 30.8 million b/d, and the call on crude as measured by the IEA by the third quarter is 31.6 million b/d, and then you take 600,000 b/d out of that for Qatar, it looks like a market headed toward a balance.
If you want to see how the crude market is doing in terms of balancing itself, and you only have about two minutes to do it, look for OPEC production estimates from organizations like S&P Global Platts, compare them against the latest IEA estimates on the call, and the difference will be indicative.
—There are two ways to look at the strife in Venezuela.
The bullish case: the country’s output actually appears to have stabilized at about 1.1 million b/d. Further turmoil, particularly if the Maduro regime stays in power, will almost certainly drive production lower and boost oil markets. If U.S. sanctions go into effect, it’s going to mean that Venezuelan crude, which is a perfect match for U.S. refiners built to process it, will look for a home elsewhere. While it may need to be heavily discounted into other refineries not set up to process such heavy crude, it still means that an efficient supply chain is being disrupted, and that’s always bullish for prices.
The bearish case: It’s a lot more interesting. First of all, if Maduro is ousted and opposition leader Juan Guaidó becomes president, he has pledged to seek foreign partners and changes in the country’s hydrocarbon law to reverse the industry’s long slide. That will take a long time but it should at least stabilize the declines in production. Note that with the world’s largest reserves, the plan to try to find outside assistance to exploit them has always been a love/hate affair
Venezuela is the big unknown in the market now, and turmoil in what is still one of the biggest oil producers in the world has not visibly impacted prices. That’s a testament to the fact that it’s difficult to know not only how it will play out but how whatever happens will impact market balances.
Although markets on the surface appeared steady this week, the fact is that most benchmark numbers were down by about 2 percent over the course of the trading week. But that came after a period of several days in which prices rose slightly. The fact is that prices have moved little this year. Since January 10, when markets completed their remarkable $10/barrel climb from their Christmas Eve low, the price of West Texas Intermediate (WTI) stands at around $53/b, a gain of not even $1. The value of the commodity price of diesel relative to Brent crude is down about 1 cent per gallon. That will be an important spread to watch all year as the market looks to see whether diesel starts to move
—One note on the success of the U.S. shale play: last year, the EIA, in its annual energy outlook, said the U.S. would become a net petroleum exporter by 2022. One year later, the agency predicted it will happen next year. Below is a chart showing net petroleum imports. Net imports include everything: exports of everything from crude to propane to petroleum coke (which for a long time was easily the biggest petroleum export product out of the U.S.) and imports of everything as well. The U.S. imports some of the same things it exports. A shipment of gasoline might be going off the Gulf Coast to Latin America while a tanker of gasoline might be coming into Boston harbor. When the math is all done, you get a figure for net imports. Here’s what has happened to them in the last 15 years.
