Bearish Outlook Could Be a Contrary Signal
- Long-term expectations of lower prices are influencing capital expenditure decisions
- National governments seeking investments other than oil production
- WTI crude oil price no longer in significant carry—a bullish sign
- Natural gas injections lower than five-year average
The Matrix
Some OPEC nations have been wrestling with the challenge of undue reliance on oil income as a major part of national revenue. Saudi Arabia has moved toward selling part of Saudi Aramco and developing alternative revenue sources. More recently, Nigeria has approved a plan to reduce exploration costs.
Nigeria will develop refining and petrochemical sectors because “the era of oil booms may be over for good…” The Nigerian plan notes, oil “demand growth will markedly soften, except for the petrochemicals sector, which is likely to be the main market for oil … Nigeria has to move downstream into the value-added sectors of refining and petrochemicals.”
Private oil companies have echoed these increasingly bearish industry sentiments. In 2015, one major oil company CEO opined that oil prices would be “lower for longer.” One company expects oil demand to peak in the next 15 years or so. The International Energy Agency (IEA) puts the peak around 2040.
And now comes an even gloomier assessment from another senior oil executive, “lower forever.” Contrarian investors could take “lower forever” as capitulation of the bears and an indication of the next rally.
Contrarians believe that most investors over-rely on recent trends and tend to accept the current state of affairs as continuing. So, prices falling, for example, will continue to fall. But things change.
At the beginning of July, the Weekly Energy Situation noted, “The recovery of production in the United States offers the reason for calm, even complacent reaction to events that otherwise could have moved prices substantially.” Now, only three weeks later, oil prices have broken resistance and factors that seemed predicable and controllable are starting to present bullishly.
The upward shift in nearby prices is dramatic, with little carry remaining. It is likely that WTI prices will flip into backwardation, with near prices higher than more distant months. Brent crude oil has already backwardated.
Not too many years ago, the industry fretted over peak oil. The development of fracturing technology has put that concern in abeyance. Never at a loss to find something to worry about, industry philosophers now focus on demand peaking. Since peaking supply or peaking demand do not seem to be immediate concerns, petroleum industry participants would best focus on the traditional factors that move prices. U.S. production, OPEC tensions, growth of non-traditional supply like solar and wind power and the business cycle provide enough to keep us guessing for the foreseeable future.
Supply/Demand Balances
Supply/demand data in the United States for the week ending July 21, 2017, were released by the Energy Information Administration (EIA).
Total commercial stocks of petroleum decreased 9.5 million barrels during the week ending July 21, 2017.
Draws were reported in stocks of gasoline, fuel ethanol, distillates and other oils. Builds were reported in stocks of K-jet fuel, residual fuel oil and propane.
Commercial crude oil supplies in the United States decreased to 483.4 million barrels, a draw of 7.2 million barrels.
Crude oil supplies decreased in three of the five PAD Districts. PADD 2 (Midwest) crude oil stocks declined 1.7 million barrels, PAD District 3 (Gulf Coast) crude stocks retreated 4.4 million barrels and PADD 5 (West Coast) stocks fell 1.0 million barrels. PAD District 1 (East Coast) crude oil stocks increased 0.1 million barrels whereas PADD 4 (Rockies) crude oil stocks were unchanged from the previous report week.
Cushing, Oklahoma, inventories decreased 1.7 million barrels from the previous report week to 55.8 million barrels.
Domestic crude oil production had a net decrease of 19,000 barrels daily to 9.410 million barrels per day. However, this net decline stemmed from a 54,000-barrel-per-day drop in Alaskan production; crude oil production in the Lower 48 increased 35,000 barrels per day week over week.
Crude oil imports averaged 8.044 million barrels per day, a daily increase of 48,000 barrels. Exports rose 302,000 barrels daily to 1.030 million barrels per day.
Refineries used 94.3% of capacity, an increase of 0.3 percentage points from the previous report week.
Crude oil inputs to refineries increased 166,000 barrels daily. There were 17.285 million barrels per day of crude oil run to facilities. Gross inputs, which include blending stocks, rose 56,000 barrels daily to 17.556 million barrels daily.
Total petroleum product inventories saw a decrease of 2.3 million barrels from the previous report week.
Gasoline stocks decreased 1.0 million barrels; total stocks are 230.2 million barrels.
Demand for gasoline rose 229,000 barrels per day to 9.821 million barrels daily.
Total product demand increased 111,000 barrels daily to 21.289 million barrels per day.
Distillate fuel oil supply fell 1.9 million barrels to 149.6 million barrels. National distillate demand was reported at 4.376 million barrels per day during the report week. This was a weekly increase of 41,000 barrels daily.
Propane stocks rose 0.2 million barrels; total stocks are 65.9 million barrels. Current demand is estimated at 1.2 million barrels per day, an increase of 500,000 barrels daily from the previous report week.
Natural Gas
According to the EIA:
Working gas in storage was 2,990 Bcf as of Friday, July 21, 2017, according to EIA estimates. This represents a net increase of 17 Bcf from the previous week. Stocks were 302 Bcf less than last year at this time and 111 Bcf above the five-year average of 2,879 Bcf. At 2,990 Bcf, total working gas is within the five-year historical range.
So far in the 2017 refill season, net injections into working gas storage are lower than the five-year average in most regions of the Lower 48 states. Net injections into working gas are at 939 Bcf since March 31, 2017—the traditional beginning of the refill season—compared with the five-year average of 1,093 Bcf over the same period.
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