Energy Prospectus

Read summary: https://www.iea.org/oilmarketreport/omrpublic/

The July IEA report is somewhat confusing to me, but it does say the world's crude oil supply / demand is close to back in balance. Causing confusion are their comments about inventories.

I believe non-OPEC oil supply will continue to fall and accelerate in Q3. IEA's forecast of a slight rebound in oil supply in 2017 only happens with higher oil prices than we have today.

Here is Roth Capital's take on the IEA's Monthly Oil Market Report.

Crude Oil: IEA Monthly Report: Positive report from the IEA as the agency adjusts global demand estimates higher, notching 2016 to 1.4 million b/d and moving up 2017 estimates to 1.3 million b/d. The increased demand estimates driven largely by non-OECD with China contributing 300,000 b/d and other Asia 600,000 b/d. But OECD demand growth not shabby with a 200,000 b/d contribution.

Non-OPEC Production: The agency made no major changes and is essentially staying with its 2016 non-OPEC production decline of 900,000 b/d with majority occurring in the U.S. The IEA’s 2017 call is for Non-OPEC production growth of about 300,000 b/d, mainly from the U.S. We believe this is a bit too optimistic, in part due to the reasons set forth further below.

OPEC Production: June 2016 was up 400,000 b/d month over month led by Saudi Arabia (up 200,000 b/d) and Nigeria (up 130,000 b/d, from repairs to offline facilities). Iran and Iraq were basically flat at 3.7 million b/d and 4.3 b/d respectively. The Saudi increase is likely seasonal, in our view, probably to meet increased summer power generation demand. [Important point here is that increased Saudi production does not increase exports, but is consumed in country.]

On 7/13/2016, Reuters reported a Nigerian union representing oil workers has agreed to suspend a planned strike, a petroleum ministry official said on Wednesday.

On 7/15/2016, Reuters reported ExxonMobil (XOM-NC) declared force majeure on exports of Nigeria's Qua Iboe crude oil, the country's largest export stream, a spokesman said on Friday. The declaration came after the company observed a "system anomaly" during a routine check of its loading facility on July 14.

Also on 7/15/2016, Reuters reported China's domestic crude oil production during 1H 2016 fell 4.6% from a year ago, official data showed on Friday, as producers cut back on lower oil prices.

Natural gas in storage: The EIA reported a build of 64 Bcf, slightly above the forecast build of 62 Bcf and sharply below last year's build of 98 Bcf. U.S. working gas in storage is now at 3,243 Bcf, which is 22% above the five-year average of 2,657 Bcf, and 19% above last year's level of 2,736 Bcf. Weather forecasts for the U.S. over the next six to 10 days call for above-average temperatures across the majority of the Lower 48. In our view, gas storage remains at record levels but the pace of injections is below last year and points to a rebalancing over the course of the summer. [As I pointed out in my weekly podcast, we need a lot more gas in storage today than we did five years ago. The U.S. gas market has grown by ~10 Bcf per day in the last five years as demand for power generation, exports and industrial demand are much higher today. Plus, over 90% of new homes heat with gas.]

We are in virtually constant conversations with E&P executives and professionals regarding what the recovery in upstream activity may look like. This week Reuters ran a story that we believe was spot on concerning this subject, and the report mirrors our views and the conversations we mentioned.

On 7/14/2016, Reuters reported that conversations with larger producers, contractors and suppliers suggest that any recovery will look very different from the 2009-2014 shale boom. The loss of thousands of workers during the two-year downturn and dearth of candidates to replace them is just one challenge. More than 100,000 U.S. oil and gas jobs have been lost since late 2014, according to the Bureau of Labor Statistics. Early retirements, minimal hiring of new graduates, and a loss of early-career professionals to other industries have reduced the workforce. The latest rout in oil prices has been the last straw for many workers just getting back on their feet after the last downturn in 2008, said Reg MacDonald, president of Maritime Drilling Schools Ltd in Canada, which trains workers for oilfield jobs all over the world. [As I have pointed out here many times, the oilfield services sector has been devastated during this oil price cycle. Regardless, of how high oil prices go it will take a long time to ramp up drilling & completion activity. IMO we are less than a year away from a significant oil shortage.]