Energy Prospectus

On January 19, 2018 the International Energy Agency published their monthly Oil Market Report.

Summary here: https://www.iea.org/oilmarketreport/omrpublic/

Key Point: "Global crude oil markets saw an exceptionally tight 4Q17 as the large draw in OECD crude stocks coincided with a decline in Chinese implied crude balances. The combined draw is estimated at 1 million barrels per day." < Keep in mind that demand for oil is seasonal and the peak demand occurs from mid Q2 to mid Q3.

This is the part of the report getting today's headlines (and weighing on markets, imo):

"Rapid US growth and gains in Canada and Brazil will drive up non-OPEC supply by 1.7 mb/d in 2018, versus last year's 0.7 mb/d increase. US crude supply will push past 10 mb/d, overtaking Saudi Arabia and rivalling Russia."

Example: IEA Sees ‘Explosive’ Growth in U.S. Oil Output as Prices Rally (Bloomberg) https://www.bloomberg.com/news/articles ... ices-rally

Excerpt:

Gains in U.S., Canada will outweigh declines elsewhere: IEA
Oil trading near 3-year high is stimulating new crude supply

IEA's Birol Says Growing Oil Production Will Push Down Prices

OPEC’s fear that another surge of shale oil could neutralize its production cuts might be coming true.

U.S. oil output is set for “explosive” growth this year as prices rally, the International Energy Agency said on Friday. That was just one of a chorus of voices from Goldman Sachs group Inc. to OPEC itself warning of a looming output surge reminiscent of the “heady days” of the first shale boom.

As the Organization of Petroleum Exporting Countries and allies including Russia gather in Oman this weekend, achievements including a three-year high in oil prices and rapidly dwindling supply glut may be overshadowed by the risk of becoming victims of their own success.
Heady Days

Non-OPEC oil output growth in 2018 is comparable with the best years of U.S. shale boom

Source: International Energy Agency

“The big 2018 supply story is unfolding fast in the Americas” the IEA said in its monthly report. “Explosive growth in the U.S. and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico.”

Even with the moderate price response to the OPEC-led cuts during most of 2017, rival suppliers still managed to bounce back with output growth of 700,000 barrels a day, the IEA said. As producers react to the recent surge in Brent crude above $70 a barrel, the agency expects non-OPEC supply to expand by 1.7 million this year, the biggest jump since the peak of the shale boom.

U.S. Oil Output Expected to Surpass Saudi Arabia, Rivaling Russia for Top Spot. Wall Street Journal.

Surging U.S. crude oil production this year is expected to surpass output in Saudi Arabia and rival that of Russia, the world’s two largest oil producers, the International Energy Agency said Friday. Boosted by a resurgent shale industry, U.S. crude production will likely climb above 10 million barrels a day in 2018, an all-time high not seen since 1970, the agency said in its closely watched monthly oil market report. The IEA raised its outlook for U.S. crude supply this year by 260,000 barrels a day, to a record 10.4 million barrels a day, largely a result of the recent rally in crude prices. “The stage was set for a strong expansion last year when non-OPEC supply, led by the U.S…pushed up world production,” offsetting output cuts by the Organization of the Petroleum Exporting Countries and other producers, the agency wrote.

IEA has a long history of under-estimating demand growth at the beginning of each year and then revising the demand growth number higher as we move through the year.

Investment bankers see upward trend for industry. Midland Reporter-Telegram.

It may not be a straight line, but managing partners at the Dallas-based investment banking firm Capital Alliance Corp. believe the slope of oil prices over the course of 2018 will show an upward trend. “We’re comfortable in saying prices will be in a range of $60 to $70 for quite some time,” Bryan Livingston, managing partner at Capital Alliance said in a phone interview from his Dallas office. He and Paul Puri, also a managing partner, last summer accurately predicted that underlying market fundamentals would reverse a price decline and power a price recovery by the end of the year. Livingston said it’s important that the two be able to speak with their clients “with rational expectations.” As they looked at expectations for 2018, he said, they “tried to pay attention to what had changed with supply and demand.

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Keep in mind that all of my forecast/valuation models are based on 2018 & 2019 commodity prices of $50 for WTI ad $3.00 for HH gas (adjusted for hedges and regional differentials).

<<Keep in mind that all of my forecast/valuation models are based on 2018 & 2019 commodity prices of $50 for WTI ad $3.00 for HH gas (adjusted for hedges and regional differentials).>> Dan, that's true and pertinent. But that assumes that investors are rationally tuned to fundamentals and numbers. But there's a second motivation in play, the "animal spirits" or intuition (or prejudice) that may run away w/ markets. Right now the animal spirits are running, perhaps to protect their euphoria about the general mkt, perhaps wanting to believe the hype about US production "beating" the Saudis and Russians. That motive suite will change, but in the meantime it's certainly fooled some of us.

You are 100% correct that investors (i.e. - the large fund managers that control the stock market) are driven more by "paradigms" than by fundamentals. All I can do is show you (via accurate forecast models) that these companies are going to make a lot of money if oil prices stay anywhere close to what they are today. Eventually, market "paradigms" change.

In my opinion;
> The market over-reacts to the IEA monthly reports.
> The agency tends to choose words that will stabilize oil prices.
> IEA and EIA are agencies full of people that want to maintain low energy prices because it helps the over-all economies of their "bosses".

For example: The HUGE drop in OECD oil inventories in Q4 is "reality" and suggests a much tighter market than what IEA said the 4th quarter would be just three months ago.

IMO the world's actual demand for energy is nowhere close to being met. We are spoiled in the U.S. because we have abundant and cheap energy. Half of the humans on this planet live in areas that don't have steady electricity or fuel supplies.