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Thursday, January 8, 2015

Three Graphs That May Hold The Key To The Price Collapse -- Richard Zeits -- January 5, 2015

Link here to Seeking Alpha.

I think I forgot to link this the other day; we might have been traveling cross-country or preparing for the trip. A reader sent me the link: big "thank you." Much appreciated.

From Richard Zeits: Crude Oil: 3 Graphs That May Hold The Key To The Price Collapse.

The first graph:
Based on this data, global crude oil stocks have increased by approximately 200-225 million barrels over the past twelve months. This increase in stocks cannot be attributed to the seasonality of demand. The data imply excess supply of approximately 0.6 million barrels per day over the past twelve months, on average. 
That's interesting. I forget the source I posted a few weeks ago, but he said the same thing: 600,000 bopd.

But then additional graphs:
EIA's estimates that combined oil production capacity that is currently disrupted exceed 3 million barrels per day, which is five times greater than the estimated apparent oversupply of 0.6 million barrels per day during 2014.
As a result, it would be structurally incorrect to reason that 0.6 million barrels per day is all it takes to balance the market. Excess supply is a moving target that may change rapidly, in either direction. To some degree, the same is true about the demand.
Zeits then asks: So what makes the current oil price correction so much deeper than the one in 2012? There is hardly a fully satisfactory answer. However, the following observations may be relevant, Zeits suggests:
  • a logical question comes to mind: if Saudi Arabia's goal is to address excess productive capacity growth, is it conceivable that supply is currently being managed to maintain the price at a sub-economic level? In an oversupply situation, it would indeed take very little to be successful in such a strategy. If this premise were accurate, it would explain the difference versus the 2012 correction.
  • second, a much larger volume of productive capacity is currently off-line due to disruptions than during the first half of 2012 (by ~1.5 million barrels a day). This capacity represents a threat of potential supply growth, and is an "overhang" that may be contributing to the pressure on the price of oil.
  • third, oversupply appears to be more persistent now than in 2012. Oil prices will have difficulty finding support as long as global crude stocks continue to build.
  • finally, global supply and demand statistics should be viewed as inherently imperfect. The current oversupply estimate is obviously not free of significant estimation error. The oversupply may simply be understated in the data.
His conclusion at the end of the linked article. 

Note: Zeits' articles over at SeekingAlpha are often archived for subscribers only after a short period of open viewing.

With regard to Richard Zeits' article above: this seems to be the second article of his in which he suggests the "oversupply" is exaggerated as a reason for the severe slump in oil prices (at least that's what I interpret what he has written about the slump).

Sometimes I think too many analysts are over-analyzing this. I've struggled with sorting it out, but one fact seems to be clear (and something very different than past OPEC/Saudi actions): protecting market share. Protecting market share is not something Saudi Arabia had to worry about before.

Now, to go back and read the comments to Zeits' article.

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