Art Berman January 2018 Macro Overview


January Oil Overview MacroVoices, January 31, 2018

OPEC Decisions & Actions Have Dominated Price Cycles Since Late 2014

  • OPEC decisions & actions have dominated oil prices since late 2014
  • Production cuts resulted in change from contango to backwardation in forward curves
  • OPEC+ production cuts probably responsible for $20-25 increase in WTI since September 2016

OPEC+ Production Cuts Have Removed Almost 600mmb From the Global Market

  • Despite lack of full OPEC+ compliance, cuts have removed ~596 million barrels of liquids from global markets since November 2016
  • US tight oil has added ~157 million barrels over the same period

Both OPEC+ and Unconventional Oil Share Responsibility for 3 Years of Low Oil Prices

  • US and Canada unconventional overproduction caused the oil price collapse
  • OPEC+ overproduction made low prices last for 3 years
  • Tight oil production has surpassed 2015 peak levels by ~414kb/d with the principal increase in the Permian basin
  • Both OPEC+ and unconventional oil continue to be potential threats to price recovery

Much US Tight Oil Cannot Be Readily Refined Because of Oil Quality Issues

  • US refinery input average is 32 API gravity but only 2% of tight oil is less than 35 API
  • Only 12% is “light” (35-40 API) & 85% is ultra-light/condensate (>40 API)

There May Be Limits to US Crude Oil Exports

  • Crude exports reached a maximum of 2mmb/d in October and have fallen to an average of 1-2mmb/d since
  • This may be because of more international competition for limited ultra-light refinery capacity
  • There have also been concerns about variable quality of US light exports
  • Condensate produces low octane gasoline & lacks middle distillates needed for diesel production
  • US light oil imports have increased mostly from West Africa
  • That is because it is cheaper to import than to pay for rail shipping & because the Jones Act prohibits foreign carriers from doing commerce between US ports
  • The threat to supply & price from tight oil may be different than many imagine

Recently Opened Diamond Pipeline Has Reduced WTI-Brent Spread by $5/barrel

  • The Diamond Pipeline will ultimately bring 200kb/d Bakken tight oil to Plains-Valero refinery in Memphis bypassing storage at Cushing
  • The Caprock Pipeline that brought tight oil from Cushing and the Gulf Coast to the Midwest is now under-utilized
  • The price of LLS & Mars crude has plummeted because it is now stranded in Louisiana
  • Caprock now plans to reverse its flow direction

US Crude + Product Inventories Are Essentially at the 5-Year Average

  • Comparative inventory is 8mmb above the 5-year average as I have predicted for many months
  • This is a counter to trader sentiment that prices will move lower
  • Curvature of the yield curve suggests that price increases should accelerate
  • Distillate and gasoline comparative inventory are near 2-year lows reflecting strength of consumption and exports

Image Source: EIA, Labyrinth Consulting Services