Sunday, April 30, 2017

The Oil Glut Is Moving To The Right -- Bloomberg -- April 30, 2017


May 1, 2017: Get over the OPEC meeting, already -- Bloomberg.
  • OPEC has no choice but to extend its production cuts
  • the extension will be a gift from the conference room in Vienna to the boardrooms of Texas and California
Original Post 

A reader sent me the link to this story: the oil glut is moving to the right.

My unedited, perhaps "not-ready-for-prime time" reply:
Excellent, excellent essay. Follows exactly what I've been saying on the blog for the past few months, but taking it one more step that has only been reported/seen in the last few weeks.
1. The first story: the oil glut.

2. The second story: the oil glut is being moved to the right -- refined products: gasoline and distillates.
This essay stresses the second story.

But the first story cannot be overlooked. For years, historically before 2015, the US was doing fine with 350 million bbls of crude oil in storage with 21 days of crude oil supply.

Now, we have 530 million bbls of crude oil in storage and 32 days of crude oil supply. These stories of weekly drawdowns of 3 million bbls/week are ludicrous. At 3 million bbls/week, it would take ((530 - 350)/3) = 60 weeks just to get back to where we were historically.

(By the way, the writer mentioned in passing the drawdown of the SPR - that, too, is / was a drop in the bucket -- the SPR drawdown is being done over several months -- I forget how long.)

A drawdown of 3 million bbls/week would consistently have to happen for 60 weeks -- more than a year. The price of oil, in my mind, is now disconnected from reality and has become an emotional response (in fact, nothing new). So, as the price of oil goes up even a bit, US shale production will increase -- making it less likely that drawdowns of 3 million bbls will happen week-after-week for the next 60 weeks (more than a year from now). And as the price increases based on these "emotional" stories that the drawdown continues, US shale will increase, and soon OPEC will become even more nervous about losing market share, and then OPEC cuts will end, as the new mantra becomes: "every Arab for himself."

A number of very smart folks who read the blog "religiously" disagree with me, suggesting that the decrease in conventional exploration since 2014 will catch up with us sooner than later. But I look at the huge amount of money that was spent on conventional exploration in 2009, 2012, and 2014, and suggest that this focus on conventional exploration has been over-hyped. It's been reported more than once that those projects begun in 2009, 2012, and 2014, are now just beginning to come on line. And producers will maximize production from those conventional projects now that the costs have been sunk (literally and figuratively).

For me, it's more about demand than supply right now. The US has to increase demand, but China has to really increase demand. India could be a big help but I don't think India becomes a significant player in the supply/demand story for another decade. A country like India can move only so fast. I may be wrong, but India seems focused on its internal economy; the US and China appear focused on the global economy. Maybe India is exporting more products to the world that I am aware, but I certainly haven't seen any indication. [I could be wrong, but India Pale Ale is a product made outside of India.]

So, back to the linked story. The oil glut moving to the right is a really, really bad news story for Prince Salman as he belatedly tries to turn his oil-producing economy to an oil-refining economy. Too little, too late, Not only does he not have the capital to do that, his country has neither the expertise, nor the inherent entrepreneurial genome required.

For investors, it seems like a great time to be looking at investing in refineries. In fact, XOM doubled its profits only because of midstream and downstream. It lost money on upstream. With regard to investing, I have always said I would never invest in airlines or refiners (stand-alone refiners). If I were more rational in my investing strategy I would re-consider the latter (refiners) but I will continue to reinvest my CVX and XOM dividends into those same companies. They will be nice holdings for my granddaughters.

By the way, did anyone see this paragraph near the end of the story in the linked story above:
At the same time, imports from Middle East OPEC countries show no sign of falling.
With delivery times to the Gulf coast averaging 42 days, output cuts made before mid-March ought to be reflected by now in lower arrivals. It's as if the crude that's been extracted in the U.S. is just swapping places with that being extracted in the Middle East.
Now, go back and look at this post:

Someone at Bloomberg must be reading the blog. But a respected news outlet like Bloomberg can't use the word crap.

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