Sunday, May 14, 2017

Reality Sucks -- May 14, 2017

Updates

Later, 10:28 a.m. Central Time: in the original post I said there was nothing really new that we had not already discussed. Actually there is. It's been obvious for the past year or so, I have just never found it worthwhile to mention, but now Bloomberg mentions in the article linked below.
Merely extending the cuts won't bring oil inventories anywhere close to their five-year average level by the end of December. And let's set aside the fact that the five-year average has been inflated by two years of surplus, which means stockpiles will have to come down significantly below that to return to normal levels.
The first time I saw the John Kemp 2015 and 2016 slides on crude oil inventories, my first thought was that "five-year averages" are now greatly affected by the last two years of huge surpluses.

Analysts are looking at five-year averages. The problem with that is even if we get back to the "five-year average" -- a rolling metric -- we will still be way above the historical average. The historical average, again, as I've been saying for quite some time, is 350 million bbls of oil (not including the SPR) and 22 days of supply.  Of the two metrics, the amount in storage, and the number of days of supply, the latter is more important, but more difficult to forecast than the former, and the former is very, very difficult to forecast besides.

But if analysts are trying to sway the market by talking about five-year averages, the smart investor might want to throw out the "outliers."
Original Post 
 
OPEC (wink, wink) is going to have to much more than simply extend its current production deal -- its own figures show it needs to double the cut (wink, wink) it made in January. I don't think there's anything new in this Bloomberg story. We've been talking about it for weeks. In fact, even doubling the cut for the last half of 2017 won't make any difference in the big scheme of things, mostly because:
  • gasoline demand in the US has been dropping
  • the cuts were minimal to begin with
  • Saudi was caught in a shell game (replacing production cuts with simply drawing from overflowing inventories -- which still exist)
  • at least three countries are exempt: Libya, Iran, and Indonesia
  • the Permian is about to meet its stride (in 2018)
  • the DAPL is flowing
  • market shifts attention to potential oversupply in 2018 (previously posted)
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