|
The
Crude Story, Part I
Brian
Trumbore
President/Editor, StocksandNews.com
Over the years, I have commented extensively
on the energy sector, particularly in my "Week in
Review" columns where I not only give updates on actual
data but my own opinion on the direction of prices
and / or share values. I have also used this space
for more extensive reports, particularly on past market-
moving events concerning the oil & gas industry.
What
follows below is a little different. It is information
from a recent internal report generated at a large
money management firm. I am not able to identify the
author, but for those of you who are energy junkies
it's terrific research.
I
edited the piece slightly, mostly to eliminate the
more technical bits, and included a news item from
this week that relates to the discussion.
---
Most
oil analysts base their supply-demand models on data
generated by the International Energy Agency (IEA),
the organization set up by the industrialized economies
in the mid- 1970s to monitor global oil markets in
the wake of the 1973 oil crisis. Since 2000, the IEA
has forecasted that future non-OPEC supply would increase
faster than global demand. However?the IEA data has
consistently underestimated global oil demand and
overestimated non-OPEC oil supply. These errors in
IEA supply and demand data led to the creation of
a huge number of "missing barrels." These enigmatic
barrels have neither been produced, nor consumed,
and can't be found physically in global inventories.
Although most energy analysts should have concluded
just by looking at US oil and refined product inventory
behavior (which was dropping when the IEA said it
should be rising) that there was something wrong with
the IEA data, they chose not to. The IEA's incorrect
forecast of a global inventory build resulted in almost
every energy analyst having a bearish oil price forecast
over the last four years?.
The
IEA's biggest problem is consistent overestimation
of non- OPEC, and particularly non-OPEC / non-FSU
(Former Soviet Union) oil production. Over the last
four years, the IEA's downward revisions of non-OPEC
/ non-FSU production from its original estimates have
been impressive.
The
IEA's original 2001 estimate was revised down by 500,000
barrels per day, and its 2002 estimate was revised
downward by 400,000 b/d. Its 2003 estimate was revised
downward by 900,000 b/d, and its 2004 estimate has
already been revised downward by 700,000 b/d. On a
four-year cumulative basis, the IEA has overestimated
non-OPEC / non-FSU production by almost 3.7 billion
barrels.
My
analysis of the global oil markets, as outlined in
(an earlier piece) shows that the reason for the IEA's
overestimation of non- OPEC oil production was centered
on erroneous analysis of both US and North Sea oil
production. In both cases, it appears that the IEA
has failed to understand (various geological constraints)?.In
2003, the IEA had originally estimated that US oil
production would rise by 100,000 b/d and that North
Sea oil production would be flat in 2004. As has been
the case over the last four years, these figures continue
to be wide off the mark. In fact, DOE (Department
of Energy) statistics now indicate that US liquids
production has probably declined by over 300,000 barrels
per day in the first six months of 2004 vs. the first
six months of 2003.
From
UK data, it appears that UK North Sea oil production
is down 400,000 barrels per day year over year in
the first six months of 2004. The drop in production
from these two sources alone accounts for almost all
of the 700,000 b/d downward revision in the IEA's
original non-OPEC supply estimate.
The
only area where the IEA has consistently underestimated
production is the FSU. This is important because over
the last three years the only area of growth in the
non-OPEC world, outside of West Africa, has been production
from the Former Soviet Union?.However, I think the
IEA trend of underestimating FSU production will come
to an end in 2004. Because of pipeline constraints
in Russia, essentially no exploration in the last
15 years, and the jailing last year of Khodorkovsky,
the head of Yukos, (which has definitely given western
oil companies something to think about regarding future
Russian investments) it looks as if the huge increases
in FSU oil production since the late '90s might be
coming to a close.
It's
interesting to note that the IEA has not revised upward
it's 2004 FSU oil production from its 11 mm barrel
per day original estimate made last year. This is
the first time in five years that the IEA has not
made a mid-year upward revision to its FSU production
forecast. It's also interesting that last week (ed.
week of 7/5/04) saw the first significant downgrade
of FSU production by a major forecasting body. The
Energy Information Administration (EIA - the statistical
arm of the DOE) cut its forecast for oil production
growth for the FSU by 100,000 b/d in 2004, and 400,000
b/d in 2005.
It's
critical to understand how important these FSU figures
are. Unanticipated FSU production has masked the underlying
non- OPEC supply problems that we are experiencing
today. If it had not been for extra FSU production,
the spike in oil prices that we are seeing today most
likely would have happened two years earlier?.
Sanford
Bernstein (attempted) to analyze when Russian oil
production will peak. Since Russian oil production
increases also represent 85% of the FSU oil production
increases over the last five years, then picking the
peak in Russian oil production is incredibly important
- the peak in FSU production will be the peak in Russian
production.
Sanford
Bernstein's conclusion is that Russian oil production
should peak in 2007 at approximately 10.2 mm b/d,
up from today's production of 9.2 mm b/d. Given that
the remainder of FSU production should grow by 150,000
b/d over the next several years, then we should see
the peak in FSU production in 2007 at approximately
12.5 mm b/d - up from today's production of 11 mm
b/d?.If the Sanford Bernstein analysis is correct?then
we should see significant slowing of FSU production
in the next several years. [Ed. There is a large find
in the Caspian Sea that does not come on line until
2008 at the earliest.]
With
the biggest acceleration of increases in FSU production
potentially behind us, the likelihood of further disappointments
in total non-OPEC production becomes greater and greater?.
There is a very large chance that non-OPEC / non-FSU
production will actually decline in the next two years.
With FSU production de-accelerating, the last large
source of non-OPEC supply growth is literally drying
up?.
According
to my (work), non-OPEC / non-FSU production has not
rolled over, in fact it has continued to grow, although
at a very slow 1% / year compounded over the last
six years, which is down from a 2% growth rate since
1980. I think that when we do hit the peak in non-OPEC
oil production, (my proprietary index) will roll over
and resemble what has happened to US natural gas production,
which has fallen precipitously over the last 4 years.
Once this non-OPEC / non-FSU index rolls over, I think
that we will have entered into what will turn out
to be an unrestrained bull market in oil. At this
point, the only source of new oil supply, with its
concurrent pricing power, would be OPEC / FSU.
In
addition to the problems with its supply forecasts,
as I mentioned above, the IEA has consistently underestimated
demand over the last 4 years, and has already severely
underestimated demand in 2004?.The IEA, by its own
revisions, underestimated global oil demand by 500,000
b/d in 2001, 600,000 b/d in 2002, and 800,000 b/d
in 2003; this year, it has already admitted to a 1,500,000
b/d revision upward from its original 2004 estimate
made in November of 2003!
Putting
all the supply and demand revisions together produces
some pretty impressive numbers. On a net basis, the
IEA's underestimation of demand and overestimation
of non-OPEC supply are this: 600,000 b/d in 2001,
800,000 b/d in 2002, 1,300,000 b/d in 2003, and 2,200,000
b/d in 2004. If you were using IEA data to make your
oil price forecasts during those years, you were incredibly
off-the-mark compared to what actually happened. Using
the revised IEA figures, the 2004 global oil market
has now slipped from an earlier projected 1.5 mm barrel
per day surplus to being balanced. This has occurred
with OPEC pumping close to 1.4 mm barrels a day more
(and near full capacity) in 2004 than in 2003. These
are still theoretical numbers, but US inventory data
imply that they are close to accurate.
I
am a firm believer that it's almost impossible for
US inventories to be anything else but a reflection
of what is happening in global crude and product markets.
Because of the tremendous growth in oil and oil product
trading in the last decade, it is impossible for oil
to draw down in one area and not draw down in another,
except for short periods of time.
Traders,
using pricing differentials and arbitrage, are able
to make the global inventory picture even out in very
short time periods. Oil analysts over the last five
years have made the repeated mistake in thinking that
even though US oil inventories were declining, they
were building up somewhere else. It was an attempt
to "find" the "missing" IEA barrels, which ultimately
never existed.
Since
the beginning of 2004, total US inventories (i.e.
crude plus refined product) have grown only slightly
and are still only 2% above last year's historic lows.
Although we have had a healthy build in crude oil
since the beginning of the year, we have not seen
corresponding builds in either gasoline or distillate
because of strong end-use demand.
Given
that we have entered the seasonal strong period of
crude oil demand, there is a good possibility that
this crude oil "cushion" is going to evaporate in
the next six months. If this cushion disappears this
summer or fall, then we will once again be back at
historically low levels in crude oil inventories,
with the potential of spiking prices to over $50 per
barrel before year- end.
---
It's
not just the IEA that has underestimated supply and
demand. A story in the Wall Street Journal, July 22,
notes:
"China's
crude-oil imports hit a record 2.8 million barrels
a day in June, suggesting the country is increasing
its dependence on imports to fuel its economy as domestic
production falls.
"Chinese
traders said full-year crude-oil imports are expected
to surpass a government forecast of 2.2 millions barrels
a day, to reach a record 2.4 million barrels a day."
Wall
Street History returns July 30 with part II?The Oil
Market in 2004 and Beyond.
Brian
Trumbore
|
