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Oct. 2017 Oil & Gas Macro: Comparative Inventory Draws Spell Higher Oil Prices

Art Berman Labyrinth Consulting Services – October 2017 Oil & Gas Discussion, October 19, 2017

Negative Correlation Between Comparative Inventory and WTI Price

  • Negative correlation between Comparative Inventory (CI) and WTI price historically
  • Mid-February CI of 213mmb near April 2016 CI peak of 239 mmb
  • 139 mmb decrease in CI by October 2017 and yet, limited price response
  • Previous price response was based on sentiment

Comparative Inventory vs. WTI Price Yield Curve

ci yield

  • Yield curve is not a mathematical regression because price excursions based on sentiment (both positive and negative) and not based on supply-demand fundamentals
  • Mid-cycle price is where yield curve intersects y-axis (5-year average)
  • Limited price response in 2017 because of huge inventory overhang
  • More curvature going forward means greater price response to falling CI

Inventory Buildup Explains 2014 Oil Price Collapse

  • Inventory build began in January 2014 but price collapse did not begin until June
  • Low price and change from backwardation to contango in forward curves favored storing rather than selling oil
  • 5-year average has risen over time as storage levels increased
  • Current 74 mmb gap between invetnroy and 5-year average still near high of 99 mmb in 2011

Refinery Intakes at Record Levels & US Consumption at Record High in 2017

  • Record refinery intake levels >17mmb/d in 2017 fell because of hurricane disruption of refinery operations and pipelines
  • Production also fell but recovered only to fall again during Nate (temporary)
  • Net crude oil imports have fallen in 2017
  • Demand for refined products has increased as economy improves and products are still cheap
  • Consumption reached record levels during summer of 2017 (now declining seasonally)
  • Greater product supplied resulted in decline of refined product net imports
  • Average 2017 net imports were 500kb/d less than in 2016 (3.5mmb/week); this is a major factor in inventory and CI reduction

Crude Oil Exports Increased 75% in 2017

  • Crude oil exports increased 364 kb/d in 2017 which translates to 2.6 mmb/week, a substantial factor in inventory and comparative inventory reductions
  • Exports competing with OPEC in European and Asian markets
  • Shale production was not a threat to OPEC before significant exports began

Diesel is a Major Growth Component for US Refined Production Consumption and Exports

  • Diesel (distillate) CI have fallen through most of 2017 and is currently negative
  • Both distillate and gasoline CI declined during hurricane disruption of refineries to meet demand

WTI Forward Curve in Backwardation

  • Backwardation means that short-dated contracts have a higher price than longer-dated contracts
  • Reflects perception of tightening supply
  • High volumes of producer hedging depressing contract prices 1-2 years in the future
  • Discourages storing oil more than 6-month contango portion of forward curve

OPEC Production Cuts and Compliance

  • OPEC-NOPEC production cuts exceeded 1.8 mmb/d in March and April
  • Now, it is about 1 mmb/d
  • Reveals inability of OPEC to meet internal commitments but still, OPEC cuts have been a factor in inventory reductions

Brent-WTI Price Difference Because of Middle East Fear Premium & Cushing Buildup

  • Brent premium to WTI price increased $5/bbl between early June and late September
  • Partly because of Persian Gulf tensions between Qatar and GCC nations
  • Also because of Kurdish Independence referendum
  • Also, Cushing CI has been building since late July
  • Contango portion of forward curve more favorable than current Gulf Coast prompt arbitrage (this is a temporary situation)

Image Source: Labyrinth Consulting Services

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