Oil Glut is gone

[dan_s]

While U.S. petroleum inventory data is useful because it is reported months earlier than other global oil inventory data, it does not
encompass the full worldwide picture. Specifically, the U.S. data only represents about 25% of global oil inventories, so we also have
to look at what’s happening in the rest of OECD, and (to the extent there is data) outside the OECD. Keeping in mind that U.S.
inventory holding costs are considered the lowest in the world, U.S. inventories typically are first to build and last to fall.
Accordingly, there is spotty but growing evidence that oil inventories outside the U.S. are also falling. For example: Iranian floating
storage collapsed by a whopping ~50 million Bbls over the past year; Saudi crude stocks are down by 21 million Bbls since the
original cut announcement (through July); Japanese crude stocks are down by ~10 million Bbls since early June; and Chinese
commercial crude stocks are essentially flat on the year (but down by ~6 million Bbls since June).
The net result of these sharp inventory reductions is that we now believe both the OECD and U.S. are “below normal” in terms of
days of consumption (for OECD) and days of production (in the U.S.) For example, in June we addressed the question of normalized
U.S. inventories and came to the conclusion that increases in U.S. production (and, to some extent, demand) currently imply a
normalized crude inventory level of ~465 million Bbls. Domestic crude inventories had already fallen below this level before the
Harvey dislocation, and we would expect them to drop below it once again once the post-Harvey refinery outages fully subside.

[dan_s]

From Raymond James on 10-2-2017
Oil fundamentals, and now “technicals” and sentiment have aligned to create what we think amounts to the perfect recipe for
higher oil and energy stock prices. While the strong oil fundamentals have been evident for over six months, negative sentiment has
directed oil prices for most of 2017. Over the past month, however, the oil market seems to have shed its bearish cloak as
evidenced by the robust oil rally over the past month. Of course, energy stocks are following suit. Having painfully underperformed
the broader market for much of 2017, the energy sector is playing catch-up, surging by more than 10% since late August. But in case
you think you’ve missed the boat, consider the fact that energy is still well into the red year-to-date despite very bullish underlying
fundamentals. Moreover, investor apathy and pessimism was near an all-time low just a few months ago. The bottom line is that
the oil market is fundamentally undersupplied, and higher oil prices from here are still necessary to bring it back into balance next
year. That means oil prices and energy stocks still have more room to run, in our view. Now that investors are starting to see energy
outperform, we believe the apathy will begin to fade and greed will begin to overwhelm fear.

[k1f]

Actually there are two problems to consider: the industry situation (glut gone) and the mentality of the market
(distracted or bearish). Here's part of Jubak's note on Schlumberger's forecast:

<<Schlumberger has seen the future of the oil and gas drilling and production sector and it hasn’t liked what it has seen. The rise of production from U.S. oil shales has led to an extended period of underinvestment in drilling, exploration, and development for the conventional international resources that are Schlumberger’s strongest market. That has led to a forecast of lower for longer at the company and among some Wall Street analysts. For example, in the company’s Resource Characterization business Morningstar was projecting that revenue would recover to 92% of its 2012-2014 average by 2021. Now that analyst is looking for only an 81% recovery. Margins, which Morningstar had expected to see recover to the 2012-2014 level are now forecast to remain about 4 percentage points lower by 2021.

To the company’s credit, management has recognized the problem and responded proactively with a big increase in a new business called Schlumberger Production Management. This new effort puts Schlumberger directly into day to day decisions on drilling, oil field management, and other aspects of managing oil production at a client’s field. This gives Schlumberger extraordinary power to recommend and then buy its own services for the oil producer. In exchange for that power Schumberger is in effect investing in its customers oil projects and linking its compensation to increases in oil production and decreases in costs.>>

http://jubakpicks.com/how-much-risk-and ... olio-pick/

It's reasonable to guess that shortages of an important commodity will eventually recover investment capital, but prudence might wonder how long could it take? Is it possible that global production will limp along w/o the sort of emergency signals that trigger the historical spike in investment?

[dan_s]

One by one the Wall Street Gang is starting to see how tight the global oil market is getting.

Martijn Rats, CFA – Morgan Stanley
October 2, 2017 11:01 PM GMT

After a 6-year bear market for Energy equities, downside risks to oil prices are diminishing, the downstream outlook is outright strong, restructuring benefits are yet to kick-in fully, and valuations are attractive. Hence, we upgrade to Attractive.

Structural or cyclical? - We say the latter: Analysing the sector's outlook starts with the question whether the relevant investment outlook is dominated by long-term structural or medium-term cyclical factors. We argue cyclical.

Undoubtedly, the energy system will change profoundly over coming decades. However, this transition will take time, allowing for a cyclical recovery in profits and for current oil & gas companies to change their own energy mix in lockstep with the world's energy mix.

Oil prices are supported at higher levels: The prospects of strong US shale growth and the possible exit from the current OPEC/non-OPEC deal appeared to be major overhangs for oil markets earlier this year. However, oil demand continues to grow well above historical trend rates - now for its third consecutive year - soaking up the excess oil. As argued in Winter is Coming, oil prices are well supported around current levels.

The downstream outlook is outright strong: The combination of strong oil demand but still modest oil prices has shifted a significant share of the value created by the oil industry to the downstream. However, Europe's integrated oil companies are capturing this too. As argued in Silver Age for Refining, downstream will likely stay a major source of FCF for the next several years.The benefits of restructuring programs are still to become fully apparent: Oil following in the footsteps of the tobacco industry - i.e. relentless focus on cost and capital efficiency - is a realistic prospect (also see Big Oil vs Other Sectors).

[dan_s]

Notes from John White at Roth Capital:

On 9/26/2017, Reuters reported Brent oil prices hovered near 26-month highs on Tuesday, supported by Turkey's threat to cut crude exports from Iraq's Kurdistan region and signs of quicker market rebalancing. Turkish President Tayyip Erdogan repeated a threat to cut off the pipeline that carries 500,000-600,000 b/d of crude from northern Iraq to the Turkish port of Ceyhan, intensifying pressure on the Kurdish autonomous region over its independence referendum. This potential loss, combined with 1.8 million b/d of output reductions by OPEC and non-OPEC producers, raised concerns of tighter supply. The Iraqi government said it will not hold talks with the Kurdistan Regional Government about the results of the referendum.

Iraq's Kurds overwhelmingly backed independence in Monday's referendum, defying neighboring countries, which fear the vote could lead to renewed conflict in the region.

Also on 9/26/2017, top oil executives gathered at the S&P Global Platts APPEC conference in Singapore said strong oil demand this year was accelerating market rebalancing and helping inventory drawdowns. "Global demand growth is way higher than what we have observed in the last couple of years, coming somewhere close to an increase of 1.6 to 1.7 million barrels per day and is driven by distillates," said Janet Kong, BP's (BP-NC) chief executive officer, supply and trading, Eastern Hemisphere.

Also at the conference, other industry executives added that strong oil demand growth in emerging economies led by China and India but also from Europe is drawing down oil stockpiles faster than expected, putting the global market firmly on track to rebalance. "We see the market over the next six months going well above $60 for a simple reason... surprisingly good demand," Adi Imsirovic, head of oil trading at Gazprom Marketing and Trading, (GAZP-NC) told the S&P Global Platts APPEC conference in Singapore.

On 9/25/2017, Iran said it aims to maintain its crude and condensate exports for the rest of 2017, though recent maintenance, depleted oil storage and a growing domestic appetite will limit shipments abroad, a senior official at the national state oil company told Reuters last Monday. Iran has a target to export around 2.6 million b/d of crude oil and condensate combined for the rest of the year, said Saeid Khoshrou, director of international affairs at National Iranian Oil Company, on the sidelines of an industry conference in Singapore. Exports of condensate will fall to about 450,000 b/d because of maintenance at the South Pars field, from an average of 550,000 b/d over the last 15 months, Khoshrou said.

The maintenance, because of a "technical problem" at South Pars, is expected to take one to two months to complete, he said. Meanwhile, crude exports are expected to stabilize at about 2.1 million to 2.3 million b/d through the end of the year, he said. “We had a huge amount of stock of condensate... but this stock is already finished – floating and onshore – whatever stock we had it is already finished… we also have to decrease the exports of condensate because of domestic demand,” said Khoshrou.