06-22-2021, 11:55 PM
(06-22-2021, 11:04 PM)EricL Wrote: I thought this was a good post from the energy board I follow.Should we buy more oil Eric?
Quote:Last time when WTI rose to $75-76 in 2018 US crude inventories touched 392mm bbl at the end of the high demand season.
WTI is at $73 now, but inventories are well behind - at 466mm, will drop to ~458mm tomorrow.
The reason - multiple factors affect oil prices, inventories is important, but it's the only one among them.
The 2nd even more important - w/w and specifically US production as the main growth driver.
In 2018 US production was at 12.5 mm bpd and at the highest growth speed of ~1.5mm bpd per year while currently - flat and 1.5 mm bpd lower. Production is not expected to rise materially in coming 2 quarters. Even in 2022 it is not expected to rise faster than perhaps 800K-1.0 mm bpd AND adding that amount by the end of 2022 only, or 1.5 years from today.
W/W production is under control of OPEC+ that adds at a very measured pace after demand recovery verification.
The 3rd - projected demand trajectory. In a typical year a high demand season ends in early September following by slower consumption and lower refinery throughput due to seasonal maintenance. However this year is different, at least the market thinks it is different.
Oil traders believe that the after-covid demand recovery will continue in the Fall and possibly Winter and Spring, and will sequentially increase demand despite seasonality and refinery maintenance.
Some Summer travel demand will fall in September, but fully compensated and increased by extra commuting (back to office), lower unemployment (higher factory and large commercial utilization) and certainly jet fuel demand recovery due to business travel.
Such demand and production trajectory impact oil futures more than current inventories that are projected to fall sequentially more and well beyond September.
I tend to expect US crude inventories to continue draining reasonably fast and eventually break down the 2018 low of 392mm bbl.
However this is not a sure thing as supply is not at full yet. A lot will depend on OPEC+ policy, and also on Iranian deal that currently has less clarity.
If no-nuke deal AND the measured OPEC+ production release at "not to exceed" to continue, AND demand rises, I tend to believe we will finally remove all excesses from w/w inventories we have built since the start of 2015. Specifically US inventories to fall to ~360mm bbl which was just above the mid point in 2010-2014, actually in the 310-380mm bbl range.
I'm fully aware about the Tailor effect and new pipeline/tank build, but my firm view is that 12-13mm bpd US production requires materially lower inventories than 6 mm bpd production 7-10 years ago. Some producing and exporting infrastructure is needed, but 50%+ imported infrastructure is not needed, 80% less in padd 3.
Even Cushing can be painlessly drained by 75% down to 20 mm bpd only...or lower as we have almost instantaneous production with no need so much storage..
Bottom line:
You have to look forward, not backward.
Oil prices are impacted by total supply (production and inventories) and demand. More important - supply and demand forward trajectory, not in static.
If you want to estimate a certain inventory level corresponding to a certain oil prices - all factors must be applied.
At currently not stable conditions (demand recovery while supply curtailment) oil traders look further and further.
After demand is fully recovered and is set for a natural growth AND production is fully recovered, oil traders will look differently I guess.
romm