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| Chart Source: Nasdaq.com Apr. 15, 2015 |
Inventory Build Is A Buy Signal?
I’m not sure exactly when and how market players started equating a ‘less-than-expected oil inventory build‘ with a buy signal. This to me merely suggests a slowdown of crude oil production increase, hardly a reason to buy up the market.
Furthermore, the inventory build in distillate, which is used primarily in industrial activities, seems like a sign of weaker broader U.S. economy, which could mean the gasoline inventory would start to build again.
Shale Output To See Its First Decline in 4 Years
Indeed, the U.S. shale oil industry is starting to feel the pinch from lower oil price, down ~60% since 2H14. Another EIA report already predicted U.S. shale will see its first monthly production drop in 4 years this May.
Read More >> Thoughts on the Current Oil Market
Among the five major U.S. shale oil regions, the Niobrara formation, northeast of Denver CO, will lead the month-over-month decline, followed by the Eagle Ford shale in Texas and the Bakken formation in North Dakota, while output from the Permian in Texas and the Utica in Ohio is expected to rise in May.
Oil rig count has been dropping like a rock since 2H14 when oil market turned bearish , and it looks like well inventory has been sufficiently depleted to finally make a dent on production.
% Change Since January 3, 2014
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| Chart Source: BofA via Business Insider, April 14, 2015 |
Shale Drillers Are More Resilient Than Expected
However, the advance in oilfield and oil and gas upstream technology has brought tremendous increase in productivity and efficiency in the U.S. shale industry, which means shale drillers, now in survival mode, are more resilient than most people (including Saudi) originally thought. If oil prices stabilize at or above current levels, expect drillers to move in again, rig count and production would quickly recover.
Read More >> Cushing and Gulf Coast Storage Filling Up Fast
OPEC Still Flooding The Market
So overall, the signs are mixed in the U.S. oil market. Outside of U.S., geopolitical tension is still high in the Middle East — escalating fighting in Yemen, and Iran nuclear deal is still pending. Meanwhile, almost like repenting the oil geopolitical premium put on by a Saudi-led campaign of air strikes against Iran-allied Houthi rebels at Yemen, OPEC pumped 31.02 million barrels per day in March, near a two-year high, pressuring any positive sign from demand or anywhere, for that matter. In a way, Saudi is trying to delay or put a stop to the ongoing energy switch and substitute due to decades of high oil prices.
Iran Could Replace U.S. Shale Cutback
The production cutback by U.S. shale could be interpreted as a positive sign for oil prices in the short term, but the loss from U.S. shale could easily be offset by the increase in Iranian oil export since Iran nuclear deal is expected to have a formalized plan by mid-year.
China Sputters
For the longest time, China has been one popular excuse cited by Oil Bulls. Yes, China was on its way to replace the U.S. as the world’s largest oil consuming nation, but the growth engine is now sputtering. This was confirmed when China saw its economic growth slow to 1.3% in 1Q15, compared with growth of 1.5% in the previous three quarters.
$900Bn Wealth Transfer by Cheap Oil
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| Graphic Source: Bloomberg.com |
Lower energy prices means lower energy costs for the net oil importing countries while many oil exporting countries inside and outside OPEC are hurting. The IMF estimated in December that the oil price crash could bring in 0.7% GDP growth worldwide. Bloomberg crunched the numbers and came up with a map (above) so we know who gets what and how much. According to Bloomberg,
Net oil importers like the U.S., Europe, and Asia are getting a nearly $900 billion economic stimulus from cheaper oil prices. The Middle East and Russia are the ones getting stuck with the bill.
In other words, cheaper oil has initiated a wealth transfer effect of about $900 billion a year between net oil importers and oil exporters reversing decades of historical trend. The U.S. alone gets $180 billion, and Europe and Asia (i.e. China) are even bigger beneficiaries of this wealth transfer by cheap oil.
Lower for Longer?
So in the grand scheme of things, I agree that oil prices, just like rig count, should become ‘lower for longer” until a supply or demand shock triggered by, for example, another financial crisis, or shale oil becomes depleted / dried-up (shale typically has accelerated declining production curve, so this scenario is quite plausible). Nevertheless, the wild card would be the OPEC meeting this June amid mounting pressures from some OPEC members for some kind of coordinated production cut.
Perk Earl on Thu, 16th Apr 2015 9:04 pm
http://www.houstonchronicle.com/business/article/Schlumberger-job-cuts-reach-20-000-in-wake-of-oil-6205373.php
Schlumberger job cuts reach 20,000 in wake of oil crash
The move will bring Schlumberger’s cuts to 20,000, about 15 percent of its workforce, since it began paring jobs in recent months to cope with falling oil prices. The company expects to complete the reductions by the end of June, said spokesman Joao Felix.
The flurry of pink slips comes amid a nine-month, 50 percent collapse in crude prices that so far has cost more than 120,000 energy jobs worldwide, according to oil field staffing firm Swift Worldwide Resources.
Oil field services companies, which employ thousands in Houston, have been hit the hardest, forced to fine-tune the workforce as their customers reduce exploration activity and demand pricing concessions for equipment and personnel.
rockman on Fri, 17th Apr 2015 4:22 am
“I’m not sure exactly when and how market players started equating a ‘less-than-expected oil inventory build‘ with a buy signal. This to me merely suggests a slowdown of crude oil production increase, hardly a reason to buy up the market.”
I suppose this person hasn’t searched the historic NET STORAGE DRAWDOWN that has occurred every year at this time since they started tracking this stat. Latest numbers show virtually no decrease in US oil production so that explanation holds no water…yet. But wait till 3Q/4Q 2015 and then we can have a serious chat about the decline in production. The drawdown is a result of refineries building motor fuel inventories for the increased driving season demand. A demand that appeared to have started early during Dec 2014 presumably due to the sharp fall in fuel prices.
Demand for oil and NG in the US is cyclical on a yearly basis. Which is the primary reason $billions have been spent on oil and NG storage facilities. Just as in the case of NG consumption wellhead production and imports volumes aren’t adequate for the high demand periods for motor fuel in the summer and NG during the winter.
rockman on Fri, 17th Apr 2015 6:34 am
Earl – Yep: a bitter laugh over that “resilent shale driller” BS. Either he’s a flat out liar or has no direct connection with the oil patch. Regardless of the PR spin of the pubcos the shale players I personally know are in full panic mode.
Perk Earl on Fri, 17th Apr 2015 11:22 am
“Regardless of the PR spin of the pubcos the shale players I personally know are in full panic mode”
Interesting inside, rock. Always good to know what is actually happening in the field. These type of writers should get out more often.
rockman on Fri, 17th Apr 2015 11:40 am
Earl – The problem might be that even if some of the writers are talking to the “oil patch” they are probably visiting with the corporate spinmeisters. I just came off of a well and heading to another Saturday night. And while I don’t do the Eagle Ford I deal with many service companies that do. And I’m not exaggerating when I say panic mode. I’ve talked to numerous companies with 50 to 100 FORMER employees that have laid off 50% to 90% of those employees. A while back I mentioned one of vendors that fired 36 of the 37 hands in their office. There salesman was running the job and for muscle on location he just hired day labor as need for each job. I was around during the collapse in the mid 80’s and it took a couple of years for the pain to spread as far as it has in the last several months.
Again these asses keep referring to “efficiency gains”. That’s very true. There have been tremendous gains…from the early days. There’s been virtually no significant gains in the last year or so: wells aren’t getting drilled faster and fracs are getting smaller since th rig count started going off the cliff. In fact, the huge jump in frac stages is an indication of the difficulty to get new wells to produce as good as they did a year+ ago: companies are spending $millions more for fracs today because they don’t need to.
BobInget on Fri, 17th Apr 2015 5:40 pm
Instead of writing “OPEC has increased output”, be specific. It was Saudi Arabia
making the push to knock out Iran.
As it happens, everyone underestimates
China’s capacity to locate trouble, turn it to advantage. Also, India is currently growing
at 7.5 % vs China’s measly 7%.
I seriously doubt anyone but China, India and Iran know these exact import/export numbers.
As KSA realized it was shooting blanks, hurting everyone hard but Iran, Saudi Arabia decided to double down in Yemen.
Like every preemptive war before, Yemen,
a huge strategic error of Iraq
proportions. In a few more months every nation in and out of the region will be up to their necks ‘In the Big Muddy’.
When we were writing nine months ago up to the present, Iran and Saudi Arabia were in fact at war, (in Syria) few listened. Now that
KSA is busy at genocide, oil markets figured out what we here knew.
I always ended my posts with jocular,
“With Iran and Saudi Arabia and Russia and the US dug-in to Syria, what could go wrong?”
Stay tuned.
BobInget on Fri, 17th Apr 2015 5:50 pm
Rockman,
Everything is in place for oil to rally
next week. In any case, even if next week is no better then this one, we will see a Friday close over $60.
Once the Saudis go below 10.5 M B p/d, they will have nothing remaining to export.
H. Neumann on Fri, 17th Apr 2015 9:25 pm
“Once the Saudis go below 10.5 M B p/d, they will have nothing remaining to export.”
KSA oil consumption is about 3 mb/d. What is your point ?