Oil Market
17m b/day Oil Stock Drop!
3-Aug-2023. Last week we had the biggest ever weekly drop in crude oil stocks in the US, as much as 17 million barrels. You might think there's more demand... you couldn't be more wrong! First, US demand fell by 8.77 million barrels last week, while production fell by 0.175 million barrels. This gives a "market balance" of +8.60 million barrels. Ok, net exports increased by 5.1 million barrels (you can say the demand outside the US increased). Now the balance is +3.50 million barrels. Inventories fell by 10.4 million barrels (balance of all types of inventories, not just crude oil). Now the balance of the "market surplus" is +13.9 million barrels. Now we have to adjust this balance by the change in inventories from the previous week (a decrease in inventories by 0.491 million barrels) - which gives a balance of +13.4 million barrels. Where did those barrels end up? De facto "nowhere", they went to reduce the "Adjustment" factor by exactly 13.43 million barrels (or 1.918 million barrels per day). Summary: Crude oil inventories fell by 17 million barrels (the highest ever), but the total decline in inventories was only 10.4 million barrels. Demand fell by 8.8 million barrels in the US and increased by 5.1 million barrels outside the US. Interestingly, as much as 13.4 million of these surplus barrels ended up in the reduction of "Crude Oil Adjustment" factor! All in all, little has changed. In other words, if there had been no change in Adjustment, crude oil inventories would have fallen by only 3.6 million barrels (not 17 million barrels). This is not the first time this year that we are dealing with a big change in Adjustment. See the attached table with the balance of the entire US oil and petroleum products market for the previous two weeks. In the table, I have marked the decrease of the Crude Oil Adjustment from 2.415 million barrels per day in the week of July 21 to 0.497 million barrels per day in the week of July 28.
Production Market Share
16-Sep-2023. Russia and Saudi Arabia actually support the price of oil by producing less and less. Saudi Arabia has reduced crude oil production by 900,000 barrels per day (since April), and Russia by 674,000 barrels since February. The entire OPEC reduced oil production by 2.62 million b/d (from September 2022 and 1.66 million barrels from April this year). OPEC's "lost benefits" (in the form of production volume) are also known as Spare Capacity, which currently amounts to 5.1 million barrels per day (approximately USD 470 million in daily revenue at the current oil price).
Chinese Oil Reserves
18-Sep-2023. It is interesting that China is increasing its oil reserves, while the US has been reducing its own reserves (at least until July 2023). The US sold 309 million barrels of SPR (strategic petroleum reserve) stocks from July 2020 to July 2023. The average selling price is approximately USD 88.1 per barrel. Practically since August, SPRs have started to increase (see chart). Increasing SPR stocks is, of course, additional demand… 300 million barrels for a year is 822 ths. barrels per day (this would be even more than the increase in demand for oil in China, which is growing year on year by about 400-700 ths. barrels). Only spreading purchases over 3 years or more can somehow diminish the effect of additional demand...
WTI is up 35%
18-Sep-2023. The price of WTI has already increased by approximately 35% since the beginning of July. What influences the increase in oil prices? Mainly... seasonal demand, demand from China, further production cuts by OPEC+. All three main agencies forecast a global deficit on the oil market by the end of this year – what implies higher prices. In its September forecast updates: - IEA stated that demand will eclipse supply by 1.2 million barrels a day on average during the second half of 2023. - OPEC.. that global oil markets face a supply shortfall of more than 3 million barrels in Q4 (and less than 2 million in Q3). - Similarly, EIA expects a deficit this year, which implies a decline in global oil inventories by 0.6 million b/d in 3Q23 and 0.2 million in 4Q23. In the case of seasonal demand, the peak season is just ending (September). Figure 1 and 2 show the USA as an example. In China's case, demand for oil does not equal consumption... as China is aggressively increasing its inventory levels. Consumption in China is also growing, but in line with the trend (see charts for China). By the end of the year, China should consume only 0.5 to 0.6 million b/d more (about 4% more YoY) than in 2022 (EIA forecast). According to EIA, from Q1 2024 we will see a return to surplus in the global oil market balance (which implies a drop in prices, ceteris paribus). In 2024, the business cycle will also be more advanced, with greater signs of the US economy slowing down than today.
WTI is down 12%
5-Oct-2023. Oil. Part 1 The price of WTI crude oil is already down more than 11% since the last peak (chart 1). It is good or bad? It depends on what is the cause and what is the effect. If oil falls due to falling stock prices and rising bond yields - due to fears of an upcoming slowdown - this is not good news. During a slowdown or recession, oil prices usually drop significantly. The opposite interpretation is less convincing: stocks and bond prices may stop falling because the price of oil has fallen. There were also comments that the price of oil reacted badly to the latest EIA's Weekly Petroleum Status Report. So let's check the data. Two things stand out in the latest EIA’s weekly report: (1) the decline in U.S. demand/consumption, as well as the increase in gasoline inventories. Indeed, demand fell by 6.88 million barrels in the previous week, or 0.984 million bbl per day (see chart 2). Chart 3 shows total demand on a timeline and Chart 4 shows total demand on a calendar basis, and indeed the drop in demand in September (after the holiday season) follows the seasonal pattern. The decline in demand amounted to 984 thousand barrels per day, of which 606 thousand it's gasoline. See part of Table 1 from the EIA report. We will look at gasoline itself in more detail in the next section.
5-Oct-2023. Oil. Part 2 Gasoline figures do look bad, but in my opinion they are still "on the edge"... Key facts: (1) Demand fell to 8 million barrels (and the 4-week average to 8,337 mbbl) - this is very low and unusual for this time of year: Figure 1 (2) This means -5% YoY for a 4-week series, which is quite bad... but still "on the edge": Figure 2 (3) Seasonally, we have fallen beyond the range of the last 5 calendar years: Figure 3 (4) The same graph zoom in: Figure 4 (5) Weekly increase in gasoline stocks +6.5 million bbl, the highest since January 2022: Figure 5 (6) Total gasoline stocks are increasing, but no panic here: Figure 6 All in all, disturbing data, still "at the limit", certainly to be observed in the coming weeks.
5-Oct-2023. Oil. Part 3. When things get really bad... examples of falling US total petroleum demand during previous recessions. Key facts: (1) big picture, US total demand in mln bbl/day since 1990: chart 1 (2) US total demand, YoY since 1997, in 2001 recession -6,8%, in 2008 -11,6%, in 2020 covid recession -28,0%: chart 2 (3) 2008 recession, total demand fell by 14,5% (3,1 mln bbl/d): chart 3 (4) 2001 recession, total demand fell by 10,5% (2,6 mln bbl/d): chart 4 (5) 2008 recession, annual seasonality, total demand in 2008 was lower by ca. 5% then in 2007: chart 5 (today in 2023 total demand is higher than in 2022)
US Total Product Demand
18-Oct-2023. Oil. US Total Petroleum Demand, week ending 13-Oct-2023. Total demand increased by 2.2 mb/d last week to 21.9 mb/d. But this only pushed the 4-week average up by 246 kb/d to 20.2 mb/d – see chart 1. This increase in demand is “ideally in line” with the seasonal pattern – chart 2.
US Gasoline Demand
18-Oct-2023. Oil. US Gasoline demand. Two weeks ago, EIA data on gasoline demand caused a lot of controversy. Gasoline demand fell to 8.01 mb/d in the week ending September 29. This could even be considered a recessionary signal... finally the American consumer experienced high interest rates, etc. This data was somehow controversial as it was inconsistent with other data, for example volume of car traffic. Two weeks have passed, so we can check what's happening now... and indeed that drop in demand was not confirmed and have increased by some 1 mb/d. Data points by date: 29-Sep-2023; 6-Oct-2023; 13-Oct-2023: 1) Chart 1: Gasoline demand: 8.01 mb/d, then 8.58 mb/d and today's figure 8.94 mb/d; 4-week average series: 8.34 and 8.41 and 8.54 mb/d 2) Chart 2: YoY change (for a 4-week series): -5.0% and -3.6% and -3.1% 3) Chart 3: seasonal pattern: demand returns towards the 5-year range (2018-2022).. see blue arrow in the chart 4) Chart 4: weekly change in gasoline stocks -2.4mb 5) Chart 5: Total level of gasoline stocks... slightly down. Overall, after 2 weeks, gasoline demand returned to a more neutral level. Alarm canceled.
Oil is down 22%
16-Nov-2023. Oil is down 22% from recent high (WTI, $93.68 on 27-Sep). This is interesting.. If I remember correctly, at $90, almost "everyone" was bullish back then. Today's declines seem to be the market's fear of an economic slowdown, i.e. potentially lower demand. A weaker labor market in the US, lower inflation, sharply falling bond yields... oil has joined this trend. In addition, there is somehow lower demand from China. The possible reaction of OPEC+ to falling oil prices - i.e., for example, extending production cuts by Saudi Arabia until 2024, Russia or the entire OPEC - may be a positive. The war in the Middle East also has an obvious impact on the price of oil, but the lack of broader escalation may result in some downward pressure on oil price. Additional surprise production cuts by Saudi Arabia and the pledge by Russia to reduce export have contributed to price increases in the short run, but as a rule, OPEC production changes usually do not change the main trend in oil price (but do affect the price in the short term). So are we back at the main trend right now?
17-Nov-2023. Oil is down 22% from recent high. Part 2. Chart 1 shows what is happening on the US oil market based on weekly EIA reports. In the last week (ending 10-Nov): 1) The level of total inventories has practically not changed (the weekly change is -0.06 million bbl), because in the previous week inventories increased by 1.16 million bbl - the difference between these weeks is -175 kbbl/day, 2) Total production increased by 251k bbl/day (oil production remained unchanged at 13.2 mbbl/d, while production increased mainly of "Natural Gas Plant Liquids") 3) Demand decreased by 1.64m bbl/day 4) Net Import decreased by 434k bbl/day 5) And as a result of the above changes (+175k + 251k +1,640m - 434k = 1,634m/day), for the market to balance, the Adjustment change amounted to as much as -1,634m bbl/day. The weekly change in demand seems to be significant, but this series is quite volatile, so it's worth looking at the 4-week average as well (chart 2). This week, total demand decreased by 1.64m bbl/day, but last week demand increased by 1.852m bbl/day. The 4-week average dropped only 455k bbl/day (Graph 2, bottom panel). The change in demand should also be looked at from seasonality perspective (Figure 3), but here demand does not decline and is holding up well (there is no justification for the falling oil price here). Additionally, if we look at gasoline itself (Chart 4), demand has rebounded very nicely in recent weeks and we are now exactly at the 5-year average and above 2022 (the low in gasoline demand on September 29 was disturbing, but it turned out to be temporary).
19-Nov-2023. Oil is down 22% from recent high. Part 3. However, on Friday we had a strong +4.10% rebound in the WTI price mainly as a result of shorts covering and some expectations for the OPEC+ reaction. Among others, Reuters quoted its 3 different sources regarding OPEC's decision at the next meeting on November 26: “OPEC+ is set to consider whether to make additional oil supply cuts when the group meets later this month, three OPEC+ sources told Reuters after prices dropped by almost 20 percent since late September.” The current volume of production cuts for the OPEC+ is 4.96 mb/d (Chart 1). Of this, 1.3 mb/d are additional voluntary cuts by Saudi Arabia (1.0 mb/d) and a 300 kb/d export reduction by Russia. The cuts expire virtually at the end of the year. OPEC+ will probably extend the cuts until 2024 (e.g. for the first quarter), but will the extension alone be enough? Doubtful... to change the current sentiment of slowing economy/lower demand. Further cuts would be needed... preferably surprising the market... (with the size of the cuts - but it costs money...). Historically, OPEC's decisions to change production (cut, boost or neutral) have had little impact on the main trend in oil prices. However, it had a short-term impact, especially if the cuts were large or unexpected. Chart 2 shows the history of recent OEPC+ decisions. Chart 3 shows the history since 1990.
Oil Balance Sheet
29-Nov-2023. US Oil Market Balance Sheet (week ending 24-Nov-2023). Generally, there are 3 main sources of demand and supply: 1) Production, or supply, last week in the US total production was 22.31 million b/d, 2) Consumption, i.e. demand, last week in the US total consumption (products supplied) was 18.92 million b/d, 3) Net Imports, can act as supply (import > export), or demand (export > import), last week in the USA the total Net Imports amounted to -4.45 million b/d (negative Net Imports means positive Net Export, therefore it was additional demand last week), The three points above should add up to zero, but if they don't (they practically never do), the difference goes to two things: 1) Change of Inventories, or/and 2) Level of Adjustments. Production (22.31 mb/d) minus Net Imports (-4.45) minus consumption (18.92) = 1.059 mb/d (this is how much oil is missing on the market). Since the change in Inventories was +0.46 mb/d (biuld in inventories), there was a total oil shortage of 1.52 mb/d - and this is exactly what the Adjustment amounted to (see Figure 1). Figure 2 shows the details.
Strategic Petroleum Reserve
29-Nov-2023. Oil. SPR (Strategic Petroleum Reserve) Stock. Rebuilding strategic stocks means additional demand of around 300 million bbl. The purchase of 0.313 million bbl last week does not change much (Figure 1). This is SPR's first purchase since September 29, 2023. Figure 2 shows the level of SPR and other (i.e. commercial) inventories on the timeline.
OPEC Production Cut
30-Nov-2023. Oil. OPEC additional production cuts. Even though OPEC+ today agreed on additional production cuts for Q1 2024, the price of oil reacted with a quite strong decline (over 5% intra-day). OPEC+ countries agreed on additional cuts of 0.696 mb/d (Algeria, Iraq, Kazakhstan, Kuwait, Oman, UAE), plus 0.2 mb/d Russia (cut of export of fuel oil), plus extensions of 1 mb/d cut by Saudi Arabia and of 300k b/d export cut by Russia. The total number of new cuts is 0.896 mb/day. But the market is not happy mainly because of the risk that these additional cuts are more paper cuts than real ones. Production cuts are “voluntary ones”, not part of an OPEC+ agreement.
US Oil Balance Sheet
6-Dec-2023. US Oil latest weekly data (week ending 1-Dec-2023). What is worth paying attention to: 1. Decrease in oil production by 100kb/d 2. Total inventory decreased only slightly, in total by 1.383mb (198kb/day) 3. For the second week in a row, SPR increased (but only 47kb/day, i.e. 330kb in absolute terms) 4. The largest negative weekly “Oil Adjustment” in the history of data, as much as -1.417 mb/day (there was "too much oil" on the market so one needs a negative adjustment to balance all weekly data) 5. A large increase in Net Imports (i.e. exports de facto decreased) by a total of 2.9 mb/day (vs. the previous week) to the level of -1,544 mb/day. I have marked the above points in the attached table, which contains all the most important weekly data.
SPR Fun Fact
6-Dec-2023. Oil. Fun fact. The US government bought oil for the second week in a row and increased SPR strategic stockpiles. Figure 1. The purchase price was $75.87. However, the average selling price of SPR was $88.09. The difference is $12.22. If the government bought back 300 million barrels (Figure 2) at a profit of $12.22 per barrel, the total profit would be $3.666 billion. In October, the American government spent USD 469.997 billion (so-called Total Federal Outlays, Figure 3, link below the text), which means that the expenses amounted to USD 631.72 million per 1 hour. Therefore, the profit from the SPR buyback would last for 5 hours and 48 minutes.
Trump 2.0 & Oil
28-Nov-2024. Where to find 3 million barrels of oil? Treasury Secretary nominee Scott Bessent’s '3-3-3' plan calls for a 3 million barrel increase in US oil production. But industry insiders are highly skeptical about whether that’s possible. Exxon Mobil’s Upstream President Liam Mallon: “I think a radical change is unlikely because the vast majority, if not everybody, is primarily focused on the economics of what they’re doing (..) I don’t think we’re going to see anybody in the drill, baby, drill mode.” The US is already producing a record 13.49 million bbl/day. See Figure 1. According to the EIA’s latest November STEO report, production will only increase to 13.66 in December 2025. And who could potentially increase production by 3 million barrels (even within 30 days)? Try Saudi Arabia. Today it produces 9 million barrels, and has a spare capacity of 3 million – see Figure 2. Could Trump reach some agreement with MBS? A drop in oil prices would not only help fight inflation, but it could definitely affect the finances of Iran and Russia. OPEC+ is still discussing postponing the production increase (reversing previous production cuts). And Saudi Arabia would certainly like to reverse its voluntary production cuts. In its latest report, Goldman Sachs wrote that Saudi Arabia is more likely to extend its production cuts until April 2025. Figure 3 shows the oil production volumes of Russia, the US, and Saudi Arabia from 2007 to 2024.
KSA Market Share
7-Dec-2024. How much could oil price fall outside of a recession? Try…. 75% in 2014-2016, or 60% in 1997-1998, or 46% in 2021-2022. See Figure 1. OPEC+ last week announced positive news for oil market about lower (than market expectations) supply in the near future… just delaying the start of planned output hikes to April 2025 and extending production cuts until 31-Dec-2026. Despite this, the price of WTI oil has fallen by about 4% in the last 3 days… OPEC+ voluntary amount of 2.2mln BPD will be returned to the market over 18 months from April 2025 till September 2026 (vs prev. 12 months from January 2025; vs exp. 12 months from April 2025) – see Figure 2. All in all, exiting all these production cuts is practically impossible… without a significant drop in the price of oil.. we will see if the April 2025 deadline for starting to increase production will be met.. that may be doubtful.. In such a situation, Saudi Arabia (KSA) is in an even worse situation… because its share of the oil production market is the lowest in 30 years – see Figure 3. Will KSA dare to reach an agreement with Trump on returning its production to the market? This could mean oil prices even below $50. According to the announced OPEC+ plan, it will take 18 months (from April 2025 to September 2026) for KSA to increase production by 1 million bbl. Figure 4 shows the market share of Russia, the US and KSA. Figure 5 shows the market share of Russia alone, and Figure 6 shows the market share of the US.
