For the teeming millions that don’t know by now, I’ve taken a new position with a consulting firm. I still get to write on oil, dig a little deeper in research and above all, I’m doing work as a consultant.
I’ve learned that a lot of the business of being a consultant is to keep on top of everything that is buzz. At first I was proud to let them know that I was on top of all of that. There are no oil analysts out there that know as much as I do about fracking, petronomics and the Kardashians. I think that covers about everything that is “buzz in the biz." On the fringe though, I am still trying to hone my knowledge of “change innovation," “performance metrics” and “best practices." So when I throw out the “new normal," I’m just part of the new oil industry.
The thing is that we’re still in decline. The oil market keeps falling and the best part is that nobody knows why. Forget about being an analyst, this is the prime time to be a consultant. There’s been a void of smart people thinking smart things ever since Dodd Frank washed away a lot of the Illuminati of oil. The best most people can tell you now is that there’s an “oil glut." Come on, there has to be a better buzz in the market than that. The thing is that there’s no glut here in America.
We’re just watching WTI follow the sad state of affairs in the rest of the world. As Brent is the only benchmark for foreign oil, it’s also the writing of doom on the wall. The rest of the world can’t keep up with all of the oil that the U.S. doesn’t want. To keep this simple, I’ll type slow for those that can’t read fast. The U.S. has increased oil production by 4M b/d since 2012 and we’ve increased imports from Canada to 2M b/d. That means we now bring in about 5M b/d of crude imports than we did just a few years ago. Throw Mexico’s ~1M b/d and we get that figure up to about 6M b/d. So in theory, the world has been saddled with that extra 6M b/d.
Now because better minds refuse to believe in these numbers, we have a situation where unstoppable force (OPEC) meets unmovable object (global demand). The silly thing is that it’s an even simpler calculation despite the weakness in China and the EU. When the world was peaking in 2007 OPEC was pumping 33M b/d and the U.S. was using about 15.2M b/d, of which we imported about 11M b/d of crude. So there’s the extra 3M b/d from OPEC and the other 4M b/d of imports (minus CAN and MX). That means that at the global peak, the world was only producing an extra 1M b/d of crude than we are today.
One doesn’t need to be Milton Friedman to figure out that the world is struggling to keep afloat right now, so to think that OPEC is not over producing give or take an extra 1M b/d of oil is ludicrous. The only thing that we can see fro this is that OPEC is not in a price war, they are bullying the rest of the world to slow down, including countries within OPEC. All I can say to everyone is sit tight, oil prices will go back up, because like Cher, this game never gets old.
CRUDE -2.5M – I can’t but think that this number might be a lot bigger. Something a lot like last week’s numbers (-3.7M) could be possible, especially if we see imports stay low or slip even lower. I had once thought that a lot of refiners would be busy buying crude and storing it as much as they can considering the low price here, but with Brent still holding a $3 premium, the economical sense is to just take a pass until we see that spread narrow.
GASOLINE +1.5M – This could have been a lot worse. I think that there’s plenty of incentive to make more gasoline but demand is going to find some time to ease. The only thing is that refining margins are easing and that’s going to take all the worry out of the build that we could have had. We’re going to also back off of those imports as EU refiners were able to dump the last of their supply into out market.
DISTILLATE -1.0M – Let’s get back to the best volatility left in the oil market. After the huge dip in demand last week, we’re going to see that snap right back this week. Add on top of that the fact we’re going to have a little pullback on the production that topped 5M b/d last week and we’re going to lose some of this supply.
UTILIZATION -0.5% - It was a really nice comeback from the days of darkness, but it’s time to focus once again on refining margin maintenance.
CUSHING -1.0M – There’s plenty of storage in the USGC and those pipeline are open and flowing.