Global Oil Markets
Posted: Thu Nov 12, 2015 2:16 pm
Interesting report I received from one of the top energy sector analysts at Morgan Stanley.
Crude Oil: How Oversupplied Is The Oil Market? The Answer Might Surprise You
Adam Longson, CFA, CPA – Morgan Stanley
November 12, 2015 1:54 AM GMT
Traditional oil balances overstate the magnitude of oversupply. Consensus oversupply estimates are largely overstated - ranging from 1.5-2.5 mmb/d based on long standing and often flawed methodologies. By our estimates, the average 2015 oversupply is only 0.7-1.0 mmb/d. To be fair, any degree of oversupply is negative. Until supply shortages begin to manifest, the perception of a large disconnect may continue to cause the market to look through otherwise positive events as too small to rebalance the market. However, the smaller starting point is important when considering the timing of recovery, while overstating imbalances could lead to an overreaction and setup a larger/faster recovery.
The difference in oversupply figures is driven by three primary factors:
1) Differences in the calculation used for measuring oversupply; 2) A failure to account for natural seasonal dynamics, stock changes and working stock; 3) Fundamental flaws in the construction of traditional oil balances.
There are numerous ways to calculate oversupply, but most fail to consider normal stock changes and seasonality. Determining "oversupply" is more complex than it might appear. Most calculations compare supply vs. demand or the Call-on-OPEC+stocks vs. OPEC production. However, these metrics overlook normal seasonal stock changes - or the stocks in the Call-on-OPEC+stocks . Failing to do so is like getting excited about natural gas draws in winter, even though they always draw in winter. Instead, we compare global demand and supply and net out avg implied stock changes to account for seasonal effects and natural inventory growth with demand. Even this metric fails to consider SPR builds or other factors that can swing the balance beyond historical averages.
The standard global "oil" balance is not a crude oil balance and has many fundamental flaws, in our view. Traditional "oil" balances are really quasi-product balances and rely on several inaccurate simplifying assumptions.
Crude Oil: How Oversupplied Is The Oil Market? The Answer Might Surprise You
Adam Longson, CFA, CPA – Morgan Stanley
November 12, 2015 1:54 AM GMT
Traditional oil balances overstate the magnitude of oversupply. Consensus oversupply estimates are largely overstated - ranging from 1.5-2.5 mmb/d based on long standing and often flawed methodologies. By our estimates, the average 2015 oversupply is only 0.7-1.0 mmb/d. To be fair, any degree of oversupply is negative. Until supply shortages begin to manifest, the perception of a large disconnect may continue to cause the market to look through otherwise positive events as too small to rebalance the market. However, the smaller starting point is important when considering the timing of recovery, while overstating imbalances could lead to an overreaction and setup a larger/faster recovery.
The difference in oversupply figures is driven by three primary factors:
1) Differences in the calculation used for measuring oversupply; 2) A failure to account for natural seasonal dynamics, stock changes and working stock; 3) Fundamental flaws in the construction of traditional oil balances.
There are numerous ways to calculate oversupply, but most fail to consider normal stock changes and seasonality. Determining "oversupply" is more complex than it might appear. Most calculations compare supply vs. demand or the Call-on-OPEC+stocks vs. OPEC production. However, these metrics overlook normal seasonal stock changes - or the stocks in the Call-on-OPEC+stocks . Failing to do so is like getting excited about natural gas draws in winter, even though they always draw in winter. Instead, we compare global demand and supply and net out avg implied stock changes to account for seasonal effects and natural inventory growth with demand. Even this metric fails to consider SPR builds or other factors that can swing the balance beyond historical averages.
The standard global "oil" balance is not a crude oil balance and has many fundamental flaws, in our view. Traditional "oil" balances are really quasi-product balances and rely on several inaccurate simplifying assumptions.
