Global Oil Market - June 25

[dan_s]

Raymond James just sent out a "note" with their thoughts on the OPEC+ deal.

"While the oil market has taken a rather mixed interpretation of these OPEC+ actions, we view them (and the overall state of the oil market) as decidedly BULLISH for future oil prices. In today’s Stat, we will explain why.
1) the increase in OPEC+ supply merely accelerates by about 4-5 months the supply uplift that we had already modeled;
2) the increase in OPEC+ supply will not even offset recent supply declines from Venezuela and Iran;
3) the amount of excess capacity (or supply shock buffer) in the global oil system will now approach zero in the next six months; and
4) despite the “normalization” in the absolute oil inventories, we believe the more important metric – inventories on a days of consumption basis – shows that U.S. and global oil inventories will likely be dangerously low by the end of 2018.
Simply put, the increase in OPEC plus supply is like putting a Band-Aid on a blood gushing wound that needs stitches."

"Even though the OPEC headline numbers may appear bearish on the surface, a full model update reveals that recent reductions in output capacity from several other OPEC members more than offsets the official “increase” from the rest of OPEC. Specifically, the continued meltdown in Venezuela, the effect of reinstated U.S. sanctions on Iran, as well as a few other minor downward country specific oil supply tweaks (Libya, Algeria and Angola), has reduced our old 3Q18 supply estimate by 620,000 bpd, 4Q18 by 500,000 bpd, and 2019 by a whopping 660,000 bpd."

[dan_s]

One "MYTH" that I get sent to me by EPG members and others is that Russia can raise their production rapidly. This is TOTAL HOGWASH.

Here is what Raymond James said in today Energy Stat note about Russia:

"Russian production has been steadily growing over 125,000 bpd annually for the past eight years: We expect that to continue.
First of all, we are not changing our Russian oil supply estimates at all following the recent OPEC+ announcements. We would
remind our readers that Russia was clearly gaming the system in late 2016, boosting production to unsustainable levels (likely by
flushing storage tanks) in anticipation of dropping down from those inflated levels to comply with the cuts. As shown in the chart
below, Russia was producing 11.2 million bpd in 1H16, but then miraculously surged 400,000 bpd to 11.6 million bpd by the end of
2016 (the point from which the cuts were measured). Even though Russia officially “cut” 300,000 bpd from peak 2016 levels, it is
important to note that full-year 2017 Russian production was actually UP about 100,000 bpd OVER average 2016 levels. This is
hardly surprising as the graph below shows that Russian oil supply has grown about 125,000 bpd annually (and very consistently) for
the past eight years! Because of this longstanding (and remarkably consistent) growth trend (and our belief that Russia will cheat
regardless of their rhetoric), we had already been modeling about 125,000 bpd of annual Russian oil supply growth for both 2018
and 2019 as shown clearly in the graph. These estimates have NOT changed. That means the changes suggested by the OPEC+
coalition this weekend will have absolutely no impact upon our 2018/19 Russian oil supply model."

[dan_s]

WASHINGTON (Reuters) - U.S. Energy Secretary Rick Perry said on Monday a deal between global oil producers to boost crude output reached last week may not be enough to relieve global oil markets that are stressed by supply constraints.

The Organization of the Petroleum Exporting Countries and non-OPEC countries reached an agreement on Saturday to moderately boost production after consuming countries including the United States had urged them to produce more. Saudi Arabia said the agreement would likely result in about 1 million barrels more oil output per day, or about 1 percent of global oil supplies.

"Obviously we've got a market that is stressed from a standpoint of supply," Perry told reporters. The rise in prices on Friday showed the agreement "may be a little short" of what is needed.

There are difficulties in getting crude oil to market in the Permian Basin in Texas and New Mexico, in Venezuela, which is struck with political turmoil, and in Angola, Perry said.

In addition, the United States is asking oil consuming countries to reduce their purchases of oil from Iran, an OPEC member, as Washington re-imposes sanctions on the Islamic Republic.

Perry said the United States would do everything it can to keep gasoline prices in check.

But he said the Strategic Petroleum Reserve should only be used for supply emergencies and not as a tool to manipulate markets. Several sales of crude oil from the reserve have been mandated by laws passed by Congress to help balance the federal budget.

[k1f]

It's worth remembering that investment—and timing—depends on what the mkt *believes* about supply.

[dan_s]

Good point. FEAR and GREED drive the markets. Most of the FEARs are totally over-blown.

I think there are several FEARs holding back investors from moving money into energy.
> Trump Tariffs will create a "Trade War" that will slow global economic growth and lower demand for oil. Trump's Tariff's might lower GDP growth by 0.1%. Trump and China are "positioning". This is just "noise" that sets up their starting negotiating positions.
> Saudi Arabia and Russian have excess production capacity and they will increase production.
a. they don't have much excess production capacity and
b. it would be stupid for them to do anything to lower oil prices.
c. Venezuela and Iran will report production declines that will probably zero out any OPEC+ production increases.

Plus, there are "Myths" that keep many investors out of energy.
> They think upstream companies need $100 oil to make money. $70 is the new $100. Completed well costs have come down so much that $70/bbl oil generates the same profit margin that $100/bbl oil did in early 2014.
> U.S. shale oil production can keep going up. This is not going to happen. We are already close to running out of Tier One drilling locations.
> EVs will cause demand for oil to decline. Not in my lifetime and I still feel pretty good.

If you'd like to see the new Raymond James report and why they are confident that WTI will average $70 in 2H 2018, send me an email: dmsteffens@comcast.net

Eventually, reality will trump FEAR.