Energy Prospectus

IEA still forecasting a significant increase in demand coming in the 3rd quarter. We are just beginning to see the decline in oil supply as a result of the falling active rig count. - Dan

Highlights:
> Oil prices rebounded from near six-year lows touched in January as market participants took stock of declines in US rig counts and relatively positive US economic data. At the time of writing, ICE Brent was trading at $58.25/bbl - roughly 50% below its June 2014 peak. NYMEX WTI was at $52.55/bbl.
> Global supplies fell by 235 kb/d in January to 94.1 mb/d on lower OPEC and non-OPEC production. Reductions in capital expenditures have cut projected 2015 non-OPEC supply growth to 800 kb/d. US 2015 production is seen 200 kb/d lower than in last month's Report, at an average 12.4 mb/d, with most of the cuts in 2H15.
> OPEC crude oil output fell by 240 kb/d in January to 30.31 mb/d, led by losses from Iraq and Libya. Output from Saudi Arabia, Kuwait, Angola and Nigeria edged up. Downward revisions to the non-OPEC supply growth forecast for 2H15 have raised the 'call' on OPEC to an average 30.2 mb/d - just above the group's official target of 30 mb/d.
> The forecast of global oil demand growth for 2015 is unchanged from last month's Report, at 0.9 mb/d, bringing average demand for the year to 93.4 mb/d. Growth is expected to gain momentum from a modest 0.6 mb/d gain in 2014, on a slightly improved macroeconomic outlook.
> OECD industry stocks slipped by 5.3 mb in December, roughly one tenth of the five-year average draw for the month. Consequently, inventories' surplus to average levels ballooned to 65 mb from 16 mb in November, its widest since October 2010. Preliminary data point to a seasonal 22.7 mb stock build in January.
> Global refinery crude throughputs rose by 1.1 mb/d in December, to 79.1 mb/d, before maintenance curbed activity in January. An unexpected dip in Saudi Arabian runs in November underpins a 140 kb/d downward revision to last month's assessment of 4Q14 runs, to 78.1 mb/d. Throughputs are projected to fall to 77.6 mb/d in 1Q15.

For more see: https://www.iea.org/oilmarketreport/omrpublic/

Timing the recovery from IEA report:

A partial rebound in oil prices over the last month following a 60% crash since June suggests market participants are seeing light at the end of the tunnel and growing confident that spending cuts by oil companies will lead to a market recovery. The market rallied in late January on news of a steep drop in the US rig count. Since then, oil companies provided market participants with further insights in their quarterly earnings report into the full scope of their budget cuts. Yet supplies so far remain abundant, and it will take time for investment cuts to make more than a relatively small dent on production. In the meantime, inventories are likely to build further. Barring any unforeseen disruption, OECD stocks may by mid-2015 come close to revisiting the all-time high of 2.83 billion barrels reached in August 1998, shortly before WTI prices sank to an average monthly low of $11.22/bbl.

It is not unusual in a market correction for such a gap to emerge between market expectations and current trends. Such is the cyclical nature of the oil market that the full physical impact of demand and supply responses can take months, if not years, to be felt. While price drops as large as were just experienced call for urgent measures by industry participants, the consequences of those steps can matter more in the next five to six years than in the near future, for today's investment decisions typically take years to translate into physical supply/demand reality.

Such lagged effects are the focus of the IEA's Medium-Term Oil Market Report (MTOMR), whose latest edition is released in conjunction with this Report. MTOMR 2015 points to a significant rebalancing of the market on the back of widespread upstream spending cuts, with the "Call on OPEC and stock change" forecast to bounce back over the group's current production levels by 2016 and to rise steadily thereafter. Due to the publication of MTOMR 2015, this month's Report is abridged to a full set of usual data, without commentary. MTOMR is once again provided free of charge to Report subscribers, while non-subscribers can also purchase it online (here). The Report will resume its usual format in March.

One of the findings of MTOMR 2015 is that while the lagged nature of investments will remain a hallmark of this rebalancing, as it had been of corrections to price plunges in decades past, the lag of the latest market response might in fact be shorter than usual. Thanks to the short lead time and treadmill-like spending needs of US light tight oil (LTO), non-OPEC supply has become on average more price responsive than during previous price plunges. Investment cuts in LTO, while they will only account for a portion of the oil industry's overall upstream budget cuts, will be among the first to be felt. Expectations of North American supply have been reduced by 0.5 mb/d for 4Q15 and 0.3 mb/d for 3Q15, with cuts elsewhere biting later. The swiftness of LTO supply cuts will help put a floor under prices, just as their reversal when prices rebound in earnest might put a ceiling over them.

Supply expectations for the first half of 2015 have yet to be significantly reduced, however, and the latest data for December 2014 show no further reduction in the estimate of 4Q14 supply. Industry oil stocks inched down by just a tiny fraction of their usual draw in December, sending their surplus versus average levels to 65 mb, its widest since October 2010, from 16 mb a month earlier. Preliminary data suggest stocks posted a large seasonal stock build in January. Floating storage is on the rise.

In light of recent revisions to the supply forecast, the "Call on OPEC and stock change" has been revised upwards to 30.2 mb/d for 2H15 - above OPEC's current production target, but still below current production levels. The Call for 1Q15 has been trimmed, however. Despite expectations of tightening balances by end-2015, downward market pressures may not have run their course just yet.

Cheaper gas has resulted in increased vehicle sales, but most importantly low mileage vehicles, such as trucks and SUV’s, which in turn is increasing gasoline consumption. In the February Short-Term Energy Outlook (STEO), EIA forecasts motor gasoline consumption in 2015 to increase by 80,000 barrels/day (bbl/d), or 0.9%. With average gasoline prices forecast to be 31% lower in 2015 than in 2014, this elasticity suggests that lower prices alone will increase short-term gasoline demand by about 1%.

In my opinion, global demand for transportation fuels will increase by over a million barrels per day from Q1 to Q4 as a result of lower prices and improving economies in the consuming nations. I am expecting EIA and IEA to increase their demand forecasts month after month.

Mark my words: "Within 120 days we will see a sharp increase in the global demand forecasts for crude oil".
Jim Sterling (a real Bear) is now forecasting $70/bbl WTI by the 4th quarter. In my opinion, we have a good shot at Brent spiking to over $80/bbl sometime in the 4th quarter.

The primary reason we will not see $100/bbl oil anytime soon is the strength of the U.S. dollar. I do not see much hope of the U.S. dollar weakening.

A few words of caution here:
> March to May is when a lot of refiners do their annual maintenance, so we may see a soft demand period. I expect WTI to flop around in the low $50s for a few months, then ramp up starting in May.
> If Middle East / North Africa violence increases, then oil could move higher. If ISIS attacks any of the large oilfields in Southern Iraq, then we will see a sharp increase in oil prices.
> Speculative traders that have been shorting oil futures should be very nervous and I bet they are setting tight stop loss orders. As a result we can see some significant short covering rallies.

So far, as I predicted, this is tracking the same path as the big dip in oil prices in 2008. From top to bottom took 7 months. "Bottoming" took three months. Over the next 7 months oil regained 50% of the loss, then steadily moved to over $100/bbl.