Oil prices have increased 60% since late January. Is this an oil-price recovery?
Two previous price rallies ended badly because they had little basis in market-balance fundamentals. The current rally will probably fail for the same reason.
The Oil Glut Worsens But Prices Reach 2016 Highs
Although oil prices reached the highest levels so far in 2016 during the past few days, the global over-supply of oil worsened in March.
EIA data released this week shows that the net surplus (supply minus consumption) increased to 1.45 million barrels per day. Compared to February, the surplus increased 270,000 barrels per day. That’s a bad sign for the durable price recovery that some believe is already underway.
The production freeze that OPEC plus Russia will discuss this weekend has already arrived. Supply increased only 20,000 barrels per day in March. Consumption, however, decreased by 250,000 barrels per day. That’s not good news for the world economy although first quarter consumption is commonly lower than levels during the second half of the year.
The April IEA Oil Market Report was also released this week and it largely corroborates EIA data. First quarter 2016 liquids supply surplus was 1.53 million barrels per day compared to EIA’s 1.71 million barrels per day for the quarter.
The first quarter 2016 surplus fell 220,000 barrels per day from the fourth quarter 2015. Overall supply declined 660,000 barrels per day but demand fell by 880,000 barrels per day.
IEA’s demand growth forecast for 2016 remains 1.2 million barrels per day. 2015 demand growth was a very high 1.8 million barrels per day because of low oil prices. 1.2 million barrels per day is, however, consistent with average growth from 2011 through 2014.
Oil prices have increased from $26 to $45 per barrel during the current January – April price rally. This is based partly on hope for an OPEC-plus-Russia production freeze that almost everyone agrees will do nothing to balance global oil markets.
There were two major price cycles in 2015. During the first cycle, WTI prices increased from about $44 in mid-March to more than $60 by early May over a period of about 50 days. This was based on plunging U.S. rig counts and withdrawals from storage. Prices remained around $60 per barrel for 25 days and then fell to about $38 by mid- to late August over a period of 72 days. The total trough-to-trough period of the cycle was 157 days.
During the second cycle, prices increased from $38 to more than $49 per barrel in only 7 days in late August 2015 based on good economic news about China and U.S. storage withdrawals. Prices fluctuated between $39 and $49 with an average price of almost $45 per barrel for 93 days. After falling below $40 per barrel in early December, prices dropped to $26.55 on January 20, 2016, a period of 46 days.The total trough-to-trough period of the cycle was 146 days.
At the beginning of the present cycle, prices increased from $26.55 to $33.62 in late January and then dropped to $26.21 on February 11. This “double-bottom” pattern probably tested the low-price threshold for the greater oil-price collapse that began in June 2014.
That does not mean that a price recovery is in progress. It suggests that because $26 per barrel is so far below the marginal cost of production that prices are more likely to increase going forward than to discover a lower bottom.
Following the double-bottom, prices increased to $41.45 on March 22 over a period of 40 days. Prices fell to $35.70 over the next 12 days before increasing to $42.17 on April 13. Yesterday, prices fell to $41.52. The total duration of this cycle is 63 days so far.
Aside from the global production surplus, the huge amount of oil in storage is the other key factor working against a price recovery right now.
Last week, a larger-than-anticipated 4.94 million barrel withdrawal from U.S. storage re-ignited the price rally that had stalled during the previous week. A 6.6 million barrel addition this week was largely ignored by the market as futures prices fell only $0.44 yesterday.
U.S. stocks are near record high levels of 78 million barrels more than at this time in 2015 and 138 million barrels more than the 5-year average.
OECD stocks are also at record levels of 3.13 billion barrels of liquids. That is 359 million barrels more than the 5-year average but 54% of those volumes are U.S. stocks.
Comparative inventory patterns have been mixed and unclear for the past few weeks. Cushing stocks have been decreasing but Cushing-plus-Gulf Coast and overal U.S. crude oil inventories have been alternating between decrease and increase. It is, therefore, too early to tell whether comparative inventory data supports a price increase or not.
Posted in The Petroleum Truth Report on April 14, 2016
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Headline crude prices for the week beginning 9 September 2019 – Brent: US$61/b; WTI: US$56/b
Headlines of the week
Detailed market research and continuous tracking of market developments—as well as deep, on-the-ground expertise across the globe—informs our outlook on global gas and liquefied natural gas (LNG). We forecast gas demand and then use our infrastructure and contract models to forecast supply-and-demand balances, corresponding gas flows, and pricing implications to 2035.Executive summary
The past year saw the natural-gas market grow at its fastest rate in almost a decade, supported by booming domestic markets in China and the United States and an expanding global gas trade to serve Asian markets. While the pace of growth is set to slow, gas remains the fastest-growing fossil fuel and the only fossil fuel expected to grow beyond 2035.Global gas: Demand expected to grow 0.9 percent per annum to 2035
While we expect coal demand to peak before 2025 and oil demand to peak around 2033, gas demand will continue to grow until 2035, albeit at a slower rate than seen previously. The power-generation and industrial sectors in Asia and North America and the residential and commercial sectors in Southeast Asia, including China, will drive the expected gas-demand growth. Strong growth from these regions will more than offset the demand declines from the mature gas markets of Europe and Northeast Asia.
Gas supply to meet this demand will come mainly from Africa, China, Russia, and the shale-gas-rich United States. China will double its conventional gas production from 2018 to 2035. Gas production in Europe will decline rapidly.LNG: Demand expected to grow 3.6 percent per annum to 2035, with market rebalancing expected in 2027–28
We expect LNG demand to outpace overall gas demand as Asian markets rely on more distant supplies, Europe increases its gas-import dependence, and US producers seek overseas markets for their gas (both pipe and LNG). China will be a major driver of LNG-demand growth, as its domestic supply and pipeline flows will be insufficient to meet rising demand. Similarly, Bangladesh, Pakistan, and South Asia will rely on LNG to meet the growing demand to replace declining domestic supplies. We also expect Europe to increase LNG imports to help offset declining domestic supply.
Demand growth by the middle of next decade should balance the excess LNG capacity in the current market and planned capacity additions. We expect that further capacity growth of around 250 billion cubic meters will be necessary to meet demand to 2035.
With growing shale-gas production in the United States, the country is in a position to join Australia and Qatar as a top global LNG exporter. A number of competing US projects represent the long-run marginal LNG-supply capacity.Key themes uncovered
Over the course of our analysis, we uncovered five key themes to watch for in the global gas market:
Challenges in a growing market
Gas looks the best bet of fossil fuels through the energy transition. Coal demand has already peaked while oil has a decade or so of slowing growth before electric vehicles start to make real inroads in transportation. Gas, blessed with lower carbon intensity and ample resource, is set for steady growth through 2040 on our base case projections.
LNG is surfing that wave. The LNG market will more than double in size to over 1000 bcm by 2040, a growth rate eclipsed only by renewables. A niche market not long ago, shipped LNG volumes will exceed global pipeline exports within six years.The bullish prospects will buoy spirits as industry leaders meet at Gastech, LNG’s annual gathering – held, appropriately and for the first time, in Houston – September 17-19.
Investors are scrambling to grab a piece of the action. We are witnessing a supply boom the scale of which the industry has never experienced before. Around US$240 billion will be spent between 2019 and 2025 on greenfield and brownfield LNG supply projects, backfill and finishing construction for those already underway.50% to be added to global supply
In total, these projects will bring another 182 mmtpa to market, adding 50% to global supply. Over 100 mmtpa is from the US alone, most of the rest from Qatar, Russia, Canada, and Mozambique. Still, more capital will be needed to meet demand growth beyond the mid-2020s. But the rapid growth also presents major challenges for sellers and buyers to adapt to changes in the market.
There is a risk of bottlenecks as this new supply arrives on the market. The industry will have to balance sizeable waves of fresh sales volumes with demand growing in fits and starts and across an array of disparate marketplaces – some mature, many fledglings, a good few in between.
India has built three new re-gas terminals, but imports are actually down in 2019. The pipeline network to get the gas to regional consumers has yet to be completed. Pakistan has a gas distribution network serving its northern industrial centres. But the main LNG import terminals are in the south of the country, and the commitment to invest in additional transmission lines taking gas north is fraught with political uncertainty.
China is still wrestling with third-party access and regulation of the pipeline business that is PetroChina’s core asset. Any delay could dull the growth rate in Asia’s LNG hotspot. Europe is at the early stages of replacing its rapidly depleting sources of indigenous piped gas with huge volumes of LNG imports delivered to the coast. Will Europe’s gas market adapt seamlessly to a growing reliance on LNG – especially when tested at extreme winter peaks? Time will tell.
The point-to-point business model that has served sellers (and buyers) so well over the last 60 years will be tested by market access and other factors. Buyers facing mounting competition in their domestic market will increasingly demand flexibility on volume and price, and contracts that are diverse in duration and indexation. These traditional suppliers risk leaving value, perhaps a lot of value, on the table.
In the future, sellers need to be more sophisticated. The full toolkit will have a portfolio of LNG, a mixture of equity and third-party contracted gas; a trading capability to optimise on volume and price; and the requisite logistics – access to physical capacity of ships and re-gas terminals to shift LNG to where it’s wanted. Enlightened producers have begun to move to an integrated model, better equipped to meet these demands and capture value through the chain. Pure traders will muscle in too.
Some integrated players will think big picture, LNG becoming central to an energy transition strategy. As Big Oil morphs into Big Energy, LNG will sit alongside a renewables and gas-fired power generation portfolio feeding all the way through to gas and electricity customers.
LNG trumps pipe exports...
...as the big suppliers crank up volumes