Read this first and then compare it to the G&R commentary below.
The International Energy Agency (IEA) Oil Market Report: 9 August 2019
Highlights
•Global demand fell 160 kb/d y-o-y in May, the second annual fall seen in 2019. In January to May it was up only 520 kb/d, the lowest increase for the period since 2008. Chinese oil demand was revised upwards, but India and the US show weakness. We lowered our global growth forecasts for 2019 and 2020 by 100 kb/d and 50 kb/d, to 1.1 mb/d and 1.3 mb/d, respectively.
•Global oil supply held steady in July above 100 mb/d, but fell below year earlier levels for the first time since November 2017. Robust compliance with OPEC+ supply cuts and losses from Venezuela and Iran saw OPEC oil production fall by 2 mb/d versus July 2018. Non-OPEC supply was up 1.4 mb/d y-o-y in July and is set to grow by 1.9 mb/d in 2019 and 2.2 mb/d next year.
•After a year-on-year fall in 1H19, global refining throughput is expected to pick up in the second half of the year, increasing by 0.7 mb/d. This follows the pattern of refined product demand growth, which was subdued in 1H19, but is forecast to rebound in 2H19. In 2019, China and the Middle East are alone in seeing growth in refining activity.
While geopolitical tensions in the Middle East Gulf remain high, with US sanctions recently extended to more Iranian officials and a Chinese oil importer, as well as another tanker seizure, oil prices (Brent) have eased back from the most recent high of $67/bbl. Shipping operations are at normal levels, albeit with higher insurance costs. The messages from various parties that vessels will be protected to the greatest extent possible, and the IEA’s recent statement that it is closely monitoring the oil security position in the Strait of Hormuz will have provided some reassurance.
There have been concerns about the health of the global economy expressed in recent editions of this Report and shown by reduced expectations for oil demand growth. Now, the situation is becoming even more uncertain: the US-China trade dispute remains unresolved and in September new tariffs are due to be imposed. Tension between the two has increased further this week, reflected in heavy falls for stock and commodity markets. Oil prices have been caught up in the retreat, falling to below $57/bbl earlier this week. In this Report, we took into account the International Monetary Fund’s recent downgrading of the economic outlook: they reduced by 0.1 percentage points for both 2019 and 2020 their forecast for global GDP growth to 3.2% and 3.5%, respectively.
Oil demand growth estimates have already been cut back sharply: in 1H19, we saw an increase of only 0.6 mb/d, with China the sole source of significant growth at 0.5 mb/d. Two other major markets, India and the United States, both saw demand rise by only 0.1 mb/d. For the OECD as a whole, demand has fallen for three successive quarters. In this Report, growth estimates for 2019 and 2020 have been revised down by 0.1 mb/d to 1.1 mb/d and 1.3 mb/d, respectively. There have been minor upward revisions to baseline data for 2018 and 2019 but our total number for 2019 demand is unchanged at 100.4 mb/d, incorporating a modest upgrade to our estimate for 1Q19 offset by a decrease for 3Q19. The outlook is fragile with a greater likelihood of a downward revision than an upward one.
In the meantime, the short term market balance has been tightened slightly by the reduction in supply from OPEC countries. Production fell in July by 0.2 mb/d, and it was backed up by additional cuts of 0.1 mb/d by the ten non-OPEC countries included in the OPEC+ agreement. In a clear sign of its determination to support market re-balancing, Saudi Arabia’s production was 0.7 mb/d lower than the level allowed by the output agreement. If the July level of OPEC crude oil production at 29.7 mb/d is maintained through 2019, the implied stock draw in 2H19 is 0.7 mb/d, helped also by a slower rate of non-OPEC production growth. However, this is a temporary phenomenon because our outlook for very strong non-OPEC production growth next year is unaltered at 2.2 mb/d. Under our current assumptions, in 2020, the oil market will be well supplied.
-----------------------------
MY TAKE
> Demand growth is still relentless. Despite all the "sky is falling" FEAR of a global recession, IEA's & EIA's demand growth forecasts still are over a million barrel per day increase YOY. Both agencies have a long history of understating demand growth. Global demand is now over 101,000,000 barrels per day.
> IEA is still counting on big supply growth in the U.S. when all signs point to a slow down.
> Their estimated "stock draws" of 700,000 BOPD in 2H 2019 compares to Raymond James estimated 1,900,000 BOPD draws in Q3.
> No mention of IMO 2020's impact on supply.
IEA's Monthly "Oil Market Report" - August 9
IEA's Monthly "Oil Market Report" - August 9
Last edited by dan_s on Sun Aug 11, 2019 7:27 am, edited 2 times in total.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: IEA's Monthly "Oil Market Report" - August 9
Goehring & Rozencwajg: Natural Resource Market Commentary Q2 Report
This is from G&R's quarterly report that is dated prior to today's IEA Oil Market Report. It is a bit long, but I urge all of you to read it carefully. Especially read the part about IEA's "missing barrels". Personally, I believe IEA understates demand because they are based in Paris and Europeans want to believe that humans are moving away from oil based products. There is no evidence of that so far. - Dan
---------------------------------------
Heading into a Tight Second Half: Implications for the Oil Market
Oil prices were volatile during Q2. Rising at first by nearly 10%, they then sold off by almost
25%. WTI then rallied back to finish the quarter within a few dollars of where it started--
$60/ barrel. Investor sentiment remained extremely negative throughout the quarter. Despite
the fact that oil is now up 125% from its bottom in February 2016, the S&P E&P equity
index during Q2 came within three points of its cycle low. We track the short interest in
E&P stocks. Last week, short interest reached and then exceeded February 2016 levels.
More amazing still, the Oil Service Sector Index today is 45% lower than it was when oil
was $26 per barrel.
Given all the increase in trade war rhetoric, investors have become very worried about global
oil demand. These concerns appeared validated during Q2 as crude and refined product
inventories in the United States grew more than expected. During April and May, US core
inventories grew by 30 mm bbl--a period that normally sees no growth. These figures suggested
a market that was oversupplied by 500,000 b/d.
These inventory builds caught the market off guard and we admit they surprised us as well.
However, we have reason to think they were temporary in nature. First, inventories have
drawn hugely over the last seven weeks. Core US inventories have drawn by 30 mm bbl
relative to seasonal averages (one of the largest seven-week drops ever), suggesting the market
has slipped back into deficit by over 600,000 b/d. Next, the figures were not confirmed by
global inventory numbers released by the IEA. Recall that the US Energy Information
Agency (EIA) releases weekly inventory figures for the US while the IEA released total
OECD inventory figures (a proxy for global stocks) with a two-month lag. According to
the IEA’s most recent release, OECD inventories grew by 35 mm bbl in April and May –
exactly in-line with averages for those months. This suggests the global oil markets were
balanced and not in surplus at all.
Furthermore, the US inventory figures do not make sense. For example, according to the
EIA, US demand for April and May was down 36,000 b/d year-on-year. This represents one
of the largest year-on-year declines for those two months in all of our data going back to
1984. The only time year-on-year demand has declined greater than this was post-September
11th, following the global financial crisis, and after the S&L crisis in the early 1990s. While
we do not doubt that a full-blown global trade war could impact energy demand, no other
indicator we look at suggests we are in a period nearly as bad as the post-2008 financial crisis.
What could explain the US inventory behavior in April and May? There are several possible
explanations. First, extreme rainfall in April and May delayed planting of huge portions
of the corn and soy crop (see our Agriculture section). Planting is extremely diesel-intensive
and we believe this explains several hundred thousand barrels per day of lost demand.
Next, there were an unusual number of refinery fires and outages during the first half of
2019. In fact, we never recall so many refinery outages occurring at the same time. These
outages, along with problems in the Houston Ship Channel, could very well have significantly
distorted commercial inventory figures, thereby making “apparent” demand fall
--remember, US demand is an “apparent” demand figure that is calculated indirectly from
production, imports, exports, and inventories, and is not directly observed. Finally, we
have heard rumors that increased crude shipments arriving before Iranian sanctions took
hold could explain some of the difference as well. In any event, we remain bullish given
that US inventories have now resumed their steep declines relative to seasonal levels.
Moreover, the buildup in the US during April and May appears to have been at least
partially met by inventory draws in the rest of the world, leaving global stocks in better
shape that the US figures alone would suggest.
Adding to investor bearishness during Q2, the IEA released updated figures for 2019 oil
balances as well as their first estimates for 2020. Over the last three months, the IEA lowered
global demand estimates for 2019 by 300,000 b/d while raising non-OPEC supply estimates
by 500,000 b/d, reducing the so-called “call on OPEC” by a fairly large 800,000 b/d for the
full year. Looking forward to 2020, the IEA expects that global demand will grow by 1.4 m
b/d to average 101.7 m b/d. Non-OPEC production will grow by a sizable 2.1 m b/d to
reach 72.6 m b/d, leaving the call on OPEC at 29.1 m b/d. On the surface, these figures
suggest that OPEC will need to cut production by an incremental 800,000 b/d to balance
global oil markets next year.
As long-time readers of these letters will quickly realize, the problem with the IEA estimates
continues to be the so-called “missing barrels.” As a reminder, “missing barrels” occur when,
according to IEA data, oil is produced but is neither consumed nor added to inventory.
Although this oil is labelled as “missing,” our research has always attributed these “missing
barrels” to underestimation of demand. Over time the IEA makes these “missing barrels”
disappear again by quietly rising their demand numbers higher, often years after the “missing
barrels” first appear.
At the same time as the IEA released their bearish forecast for the rest of 2019 and 2020,
they quietly raised the number of “missing barrels” for Q1 of 2019 by a huge amount – 1.6
m b/d. We cannot ever recall a higher reading. If this is truly underreported demand, which
we believe it is, then this surge in “missing barrels” severely conflicts with the slowing demand
narrative consensus. For 2018 as a whole, the IEA still lists its balancing item (that is “missing
barrels”) at 1.2 mm b/d (also a record for a full-year figure). We believe these “missing barrels”
are a clear indication that the IEA demand figures are going to be revised significantly higher
in the coming months.
Looking forward to the second half of 2019, the IEA expects global oil demand to average
101.4 mm b/d and for non-OPEC production to total 71.1 m b/d. This would leave the
call on OPEC at 30.3 m b/d – or 375,000 b/d higher than what OPEC is producing today.
Considering OECD inventories typically draw by ~250,000 b/d during the second half of
the year, this would suggest the market will remain moderately undersupplied by only 100,000
b/d for the rest of the year. However, if we assume the balancing item persists at even half
the rate of Q1, then global oil demand will average 102.2 mm b/d and the oil market will
be undersupplied relative to seasonal levels by nearly 1 m b/d for the remainder of the year.
In this case, OECD inventories will finish the year nearly 80 mm bbl below long-term
averages – an all-time record deficit.
These market balances should help propel the oil price higher during the second half of
2019. As we enter 2020, we believe balances will get even tighter. As mentioned, the IEA is
projecting global demand of 101.7 mm b/d and total non-OPEC supply of 72.6 mm b/d
leaving a call on OPEC at 29.1 mm b/d – 800,000 b/d less than current production. If Q1’s
balancing item of 1.6 m b/d were to persist throughout 2020, then OECD inventories would
draw for the full year by 800,000 b/d or nearly 300 mm bbl to finish at their lowest level
since 2004. However, even if the balancing item were to come down (indicating a market
less tight), we believe the IEA’s projections for non-OPEC oil supply growth is too high for
2020 and will need to be revised lower.
The problem once again surrounds non-OPEC production outside of the US and Russia.
This group has seen production disappoint for the past several years and we expect 2020 to
be no different. Over a year ago, when the IEA first released 2019 projections for non-OPEC
supply ex the US and Russia, they estimated it would grow by nearly 500,000 b/d year-on-year.
In their latest report, they have revised this figure down to less than 200,000 b/d. In
our past letters, we have explained why even this figure is too high. Over the past decade,
the global oil industry has not been able to discover any material sources of new supply
outside of the shale. As aging fields decline, we have argued that conventional non-OPEC
production will plateau and roll over and this is exactly what we have seen happen.
Nevertheless, the IEA is projecting that next year’s non-OPEC production outside of the US and
Russia will break a decade-long trend of disappointment and grow sharply. In aggregate,
they expect production will rebound by nearly 1 m b/d from this group – the fastest rate in
over a decade.
While it is true that Norway and Brazil will both bring on new projects in 2020, our models
tell us this will not be enough to offset declining legacy production and grow anywhere near
the rates the IEA is calling for. In total, even if we make aggressive assumptions, we cannot see
how conventional non-OPEC production will grow by more than 300,000 b/d next year –
and this figure could disappoint. Moreover, post-2020 major new project startups grind to a
virtual standstill and we expect conventional non-OPEC production will fall dramatically.
Finally, the IEA is projecting total US production to grow by 1.7 m b/d in 2019 and 1.3 m
b/d in 2020. Earlier in this letter, we explained how our new “neural network” can be used
to try and project future production levels. According to our models, this year’s growth
projections may be attainable, but next year’s figures seem too aggressive. However, we should
point out that so far in 2019 shale basin production has lagged both the consensus models
and even the models being produced by our new neural network. For example, for the first
five months of the year, the Eagle Ford has declined by 26 k b/d while the Bakken is basically
flat and the Permian has grown by 170 k b/d. This represents the slowest start to the year
since production declined outright in 2016, a deceleration of 68% compared to the first five
months of last year. As a result, we believe both the IEA’s and our own projections may have
to come down significantly.
"As I have shown you in my podcasts, U.S. crude oil production peaked in the last week of May and has yet to return to that level." - Dan.
While the consensus crowd remains worried about an oil glut next year, we are concerned
about a market that is too tight. The backwardation that persists in both the WTI and Brent
market today confirms that the physical market is very tight. The strange apparent demand
behavior from April and May appear to have been isolated incidences and both US and
OECD inventories are once again drawing relative to seasonal averages. As inventories
continue to draw in the second half, the oil price should move sharply higher. At the same
time, investor sentiment is as negative as we have ever seen it. This has created unbelievable
value in the space today with many names trading below their 2016 levels when oil was $26
per barrel. We rarely see opportunities like this and recommend a full allocation to oil-related investments.
This is from G&R's quarterly report that is dated prior to today's IEA Oil Market Report. It is a bit long, but I urge all of you to read it carefully. Especially read the part about IEA's "missing barrels". Personally, I believe IEA understates demand because they are based in Paris and Europeans want to believe that humans are moving away from oil based products. There is no evidence of that so far. - Dan
---------------------------------------
Heading into a Tight Second Half: Implications for the Oil Market
Oil prices were volatile during Q2. Rising at first by nearly 10%, they then sold off by almost
25%. WTI then rallied back to finish the quarter within a few dollars of where it started--
$60/ barrel. Investor sentiment remained extremely negative throughout the quarter. Despite
the fact that oil is now up 125% from its bottom in February 2016, the S&P E&P equity
index during Q2 came within three points of its cycle low. We track the short interest in
E&P stocks. Last week, short interest reached and then exceeded February 2016 levels.
More amazing still, the Oil Service Sector Index today is 45% lower than it was when oil
was $26 per barrel.
Given all the increase in trade war rhetoric, investors have become very worried about global
oil demand. These concerns appeared validated during Q2 as crude and refined product
inventories in the United States grew more than expected. During April and May, US core
inventories grew by 30 mm bbl--a period that normally sees no growth. These figures suggested
a market that was oversupplied by 500,000 b/d.
These inventory builds caught the market off guard and we admit they surprised us as well.
However, we have reason to think they were temporary in nature. First, inventories have
drawn hugely over the last seven weeks. Core US inventories have drawn by 30 mm bbl
relative to seasonal averages (one of the largest seven-week drops ever), suggesting the market
has slipped back into deficit by over 600,000 b/d. Next, the figures were not confirmed by
global inventory numbers released by the IEA. Recall that the US Energy Information
Agency (EIA) releases weekly inventory figures for the US while the IEA released total
OECD inventory figures (a proxy for global stocks) with a two-month lag. According to
the IEA’s most recent release, OECD inventories grew by 35 mm bbl in April and May –
exactly in-line with averages for those months. This suggests the global oil markets were
balanced and not in surplus at all.
Furthermore, the US inventory figures do not make sense. For example, according to the
EIA, US demand for April and May was down 36,000 b/d year-on-year. This represents one
of the largest year-on-year declines for those two months in all of our data going back to
1984. The only time year-on-year demand has declined greater than this was post-September
11th, following the global financial crisis, and after the S&L crisis in the early 1990s. While
we do not doubt that a full-blown global trade war could impact energy demand, no other
indicator we look at suggests we are in a period nearly as bad as the post-2008 financial crisis.
What could explain the US inventory behavior in April and May? There are several possible
explanations. First, extreme rainfall in April and May delayed planting of huge portions
of the corn and soy crop (see our Agriculture section). Planting is extremely diesel-intensive
and we believe this explains several hundred thousand barrels per day of lost demand.
Next, there were an unusual number of refinery fires and outages during the first half of
2019. In fact, we never recall so many refinery outages occurring at the same time. These
outages, along with problems in the Houston Ship Channel, could very well have significantly
distorted commercial inventory figures, thereby making “apparent” demand fall
--remember, US demand is an “apparent” demand figure that is calculated indirectly from
production, imports, exports, and inventories, and is not directly observed. Finally, we
have heard rumors that increased crude shipments arriving before Iranian sanctions took
hold could explain some of the difference as well. In any event, we remain bullish given
that US inventories have now resumed their steep declines relative to seasonal levels.
Moreover, the buildup in the US during April and May appears to have been at least
partially met by inventory draws in the rest of the world, leaving global stocks in better
shape that the US figures alone would suggest.
Adding to investor bearishness during Q2, the IEA released updated figures for 2019 oil
balances as well as their first estimates for 2020. Over the last three months, the IEA lowered
global demand estimates for 2019 by 300,000 b/d while raising non-OPEC supply estimates
by 500,000 b/d, reducing the so-called “call on OPEC” by a fairly large 800,000 b/d for the
full year. Looking forward to 2020, the IEA expects that global demand will grow by 1.4 m
b/d to average 101.7 m b/d. Non-OPEC production will grow by a sizable 2.1 m b/d to
reach 72.6 m b/d, leaving the call on OPEC at 29.1 m b/d. On the surface, these figures
suggest that OPEC will need to cut production by an incremental 800,000 b/d to balance
global oil markets next year.
As long-time readers of these letters will quickly realize, the problem with the IEA estimates
continues to be the so-called “missing barrels.” As a reminder, “missing barrels” occur when,
according to IEA data, oil is produced but is neither consumed nor added to inventory.
Although this oil is labelled as “missing,” our research has always attributed these “missing
barrels” to underestimation of demand. Over time the IEA makes these “missing barrels”
disappear again by quietly rising their demand numbers higher, often years after the “missing
barrels” first appear.
At the same time as the IEA released their bearish forecast for the rest of 2019 and 2020,
they quietly raised the number of “missing barrels” for Q1 of 2019 by a huge amount – 1.6
m b/d. We cannot ever recall a higher reading. If this is truly underreported demand, which
we believe it is, then this surge in “missing barrels” severely conflicts with the slowing demand
narrative consensus. For 2018 as a whole, the IEA still lists its balancing item (that is “missing
barrels”) at 1.2 mm b/d (also a record for a full-year figure). We believe these “missing barrels”
are a clear indication that the IEA demand figures are going to be revised significantly higher
in the coming months.
Looking forward to the second half of 2019, the IEA expects global oil demand to average
101.4 mm b/d and for non-OPEC production to total 71.1 m b/d. This would leave the
call on OPEC at 30.3 m b/d – or 375,000 b/d higher than what OPEC is producing today.
Considering OECD inventories typically draw by ~250,000 b/d during the second half of
the year, this would suggest the market will remain moderately undersupplied by only 100,000
b/d for the rest of the year. However, if we assume the balancing item persists at even half
the rate of Q1, then global oil demand will average 102.2 mm b/d and the oil market will
be undersupplied relative to seasonal levels by nearly 1 m b/d for the remainder of the year.
In this case, OECD inventories will finish the year nearly 80 mm bbl below long-term
averages – an all-time record deficit.
These market balances should help propel the oil price higher during the second half of
2019. As we enter 2020, we believe balances will get even tighter. As mentioned, the IEA is
projecting global demand of 101.7 mm b/d and total non-OPEC supply of 72.6 mm b/d
leaving a call on OPEC at 29.1 mm b/d – 800,000 b/d less than current production. If Q1’s
balancing item of 1.6 m b/d were to persist throughout 2020, then OECD inventories would
draw for the full year by 800,000 b/d or nearly 300 mm bbl to finish at their lowest level
since 2004. However, even if the balancing item were to come down (indicating a market
less tight), we believe the IEA’s projections for non-OPEC oil supply growth is too high for
2020 and will need to be revised lower.
The problem once again surrounds non-OPEC production outside of the US and Russia.
This group has seen production disappoint for the past several years and we expect 2020 to
be no different. Over a year ago, when the IEA first released 2019 projections for non-OPEC
supply ex the US and Russia, they estimated it would grow by nearly 500,000 b/d year-on-year.
In their latest report, they have revised this figure down to less than 200,000 b/d. In
our past letters, we have explained why even this figure is too high. Over the past decade,
the global oil industry has not been able to discover any material sources of new supply
outside of the shale. As aging fields decline, we have argued that conventional non-OPEC
production will plateau and roll over and this is exactly what we have seen happen.
Nevertheless, the IEA is projecting that next year’s non-OPEC production outside of the US and
Russia will break a decade-long trend of disappointment and grow sharply. In aggregate,
they expect production will rebound by nearly 1 m b/d from this group – the fastest rate in
over a decade.
While it is true that Norway and Brazil will both bring on new projects in 2020, our models
tell us this will not be enough to offset declining legacy production and grow anywhere near
the rates the IEA is calling for. In total, even if we make aggressive assumptions, we cannot see
how conventional non-OPEC production will grow by more than 300,000 b/d next year –
and this figure could disappoint. Moreover, post-2020 major new project startups grind to a
virtual standstill and we expect conventional non-OPEC production will fall dramatically.
Finally, the IEA is projecting total US production to grow by 1.7 m b/d in 2019 and 1.3 m
b/d in 2020. Earlier in this letter, we explained how our new “neural network” can be used
to try and project future production levels. According to our models, this year’s growth
projections may be attainable, but next year’s figures seem too aggressive. However, we should
point out that so far in 2019 shale basin production has lagged both the consensus models
and even the models being produced by our new neural network. For example, for the first
five months of the year, the Eagle Ford has declined by 26 k b/d while the Bakken is basically
flat and the Permian has grown by 170 k b/d. This represents the slowest start to the year
since production declined outright in 2016, a deceleration of 68% compared to the first five
months of last year. As a result, we believe both the IEA’s and our own projections may have
to come down significantly.
"As I have shown you in my podcasts, U.S. crude oil production peaked in the last week of May and has yet to return to that level." - Dan.
While the consensus crowd remains worried about an oil glut next year, we are concerned
about a market that is too tight. The backwardation that persists in both the WTI and Brent
market today confirms that the physical market is very tight. The strange apparent demand
behavior from April and May appear to have been isolated incidences and both US and
OECD inventories are once again drawing relative to seasonal averages. As inventories
continue to draw in the second half, the oil price should move sharply higher. At the same
time, investor sentiment is as negative as we have ever seen it. This has created unbelievable
value in the space today with many names trading below their 2016 levels when oil was $26
per barrel. We rarely see opportunities like this and recommend a full allocation to oil-related investments.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: IEA's Monthly "Oil Market Report" - August 9
If you'd like to read the full G&R Q2 Report (34 pages), send me an email and I will send it to you: dmsteffens@comcast.net
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group