David Yager – Yager Management Ltd.
Oilfield Service Management Consulting – Oil & Gas Writer – Energy Policy Analyst
June 2, 2017
World oil markets appear to be dominated by dates and events, not supply and demand. And so it went on May 25 when OPEC did what the entire world knew it would do which was to extend its production cuts/supply management program well into 2018. WTI fell by US$2 a barrel when the news became public.
Feel free to remain confused.
Only a few days earlier, on May 16, the International Energy Agency released its monthly world oil prognosis and the big picture was universally positive. Demand (yellow) was exceeding supply (green) and inventory or oil stocks (blue bars) were leading to reductions for the first half of 2017. What is interesting about the IEA chart is the historical reports which explain in the simplest terms why prices tanked in the past three years. No Saudi Arabian conspiracies, no drama. Supply exceeded demand, inventories grew and prices fell. The chart below explains it all.
So the real question for price takers, not price makers, is what now? The IEA data indicates that with the OPEC supply cuts grandfathered inventories will decline, demand will exceed supply, and real world oil markets should see prices rise.
Except that hasn’t happened.
What is a pragmatic approach for industry mangers who are not experts on commodity trading but are simply trying to figure out how to run their companies for the rest of 2017 and beyond?
The only thing us long-term supply and demand analysts can do is present the figures. Then the readers can make their own decisions.
Oil prices simply must go up. At some point, once inventories are reduced and the commodity traders have decided there is no money to be made speculating, the price of oil will reflect replacement cost. The global replacement cost. And it is higher than US$47 a barrel.
The IEA graph above where the blue bars show projected global inventory declines for the first time since 2013 should mean something to somebody. That’s quite a while in the oil price/surplus wilderness. But the amazing thing about the OPEC meeting on May 25 and despite this data, oil went down not up.
Washington’s Energy Information Administration figures world oil demand will tag 100 million b/d next year (99.93 million). What is astonishing about that number is 20 years after the Kyoto Protocol where the governments of the western world decided we should all use less oil, the global demand curve remains growing and relentless.
The above chart shows one of the many forecasts for the continued growth in oil demand from the past, present and future. In the period under review from 1990 to 2025 oil consumption has gone from 68 million b/d in 1990 – a known fact – to an estimated 105 million b/d in the next eight years. That’s a 50% gain, an amazing figure considering this was the period in which the continued consumption of crude oil and other fossil fuels were determined to be a menace to civilization and life on earth as we know it.
What is also known is that outside of aggressive drilling in the U.S. shale plays like the Permian Basin, reinvestment in future supplies globally is quite muted. There are projects still under construction in Alberta’s oil sands that will bring on some production and a handful of long-term offshore projects in the Gulf of Mexico and offshore Brazil. The active rig count in the Middle East remains stable as the world’s lowest cost producers sustain production, congruent with OPEC’s recently renewed supply management agreement.
Meanwhile, EIA inventory reports indicate oil stocks in the U.S. are going in the right direction as America enters the summer driving season where gasoline consumption rises. The data for the week ended May 26, 2017 showed another material decline. The routine EIA report on U.S. crude oil production for the same date showed another increase to 9.342 million b/d, but in a world consuming 98 million b/d this hardly appears to be a material number on a global basis. On a global basis the increase in U.S. production the past year is in the range of 1%.
A week after the OPEC meeting, on June 1 WTI closed lower again at US$47.29 a barrel. This is about US$3 a barrel or 6% lower than the price prior to OPEC agreeing to continue with restricted output. World oil demand continues to grow. Investment in new supplies remains flat. There is no reason for oil prices to be this low, and it is unlikely this will stay this way.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principal of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.