Tag: oil
Quarterly Energy Comment (December 17, 2019)
by Bill O’Grady
The Oil Market
Since June, oil prices have held mostly within a range of $50 to $60 per barrel.
After a sharp decline in prices from late May into early June, due in part to a contra-seasonal build in inventories, inventories fell and oil prices rebounded. Rising tensions with Iran added to the lift in prices in September. Since then, we have seen a retest of the lower end of the range and a steady recovery. Soon after year-end, we usually see a seasonal rise in inventories, which tends to weigh on prices. However, with the advent of exports, that seasonal pattern has become suspect. For example, last year we didn’t see the usual increase in stockpiles.
Thoughts on Oil Demand
In general, forecasting demand is not usually a priority in commodity analysis. The shape of most short-run commodity demand curves is inelastic, which means that quantity isn’t very sensitive to price. Demand inelasticity means that a small change in supply can have outsized effects on price. It is because of that structure that commodity analysts tend to focus on supply. That being said, demand is important over the long term. For example, the effect of environmental regulations and consumer sentiment has adversely affected coal demand and severely depressed prices. The price of coal didn’t fall because supply expanded; it fell because demand declined.
Quarterly Energy Comment (August 27, 2019)
by Bill O’Grady
The Oil Market
Since June, oil prices have held within a range of $50 to $60 per barrel.
After a sharp decline in prices from late May into early June, due in part to a contra-seasonal build in inventories, inventories fell and oil prices rebounded. Rising tensions with Iran added to the lift in prices. Since then, we have seen a retest of the lower end of the range and another bounce. Unfortunately, we are heading into a weak demand period for crude oil as the summer vacation season comes to a close. Therefore, the lower support level may get tested again.
A Tale of Two Variables
Although there are several variables that affect the price of oil, within the business cycle the two we focus on are the dollar and commercial crude oil inventories. As with many situations, there are data accommodations that are necessary. Oil inventories can be problematic because, throughout history, the correlation between stockpiles and prices can flip.
Quarterly Energy Comment (March 21, 2019)
by Bill O’Grady
The Market
Oil prices have been volatile over the past few months.
In October, OPEC producers increased output in anticipation of U.S. sanctions on Iran. However, the Trump administration granted more waivers for Iranian exports than anticipated, leading to more oil supply. As the above chart shows, prices plunged, falling from $78 per barrel to near $42 per barrel. OPEC + Russia have since taken barrels off the market in a bid to boost prices. Thus far, they have had some success in this effort but, clearly, we have not seen a full recovery in prices.
Prices and Inventories
Inventory levels remain below their 2017 peak but are still above what we would consider normal levels, below 400 mb. Oil inventories rose sharply in 2015 as U.S. output rose due to shale production. Unfortunately, the U.S. had regulations in place that limited oil exports to Canada and Mexico. As these regulations were lifted, allowing for expanded oil exports, stockpiles have declined.
Quarterly Energy Comment (September 7, 2018)
by Bill O’Grady
The Market
Since mid-Q1, oil prices have ranged from a low of around $64 to a high of $71 per barrel.
Prices remain elevated, supported by OPEC production discipline, production problems in several OPEC nations, fears of new Iran sanctions and stable global oil demand.
Prices and Inventories
Inventory levels remain elevated but have clearly declined from last year’s peak.
From the late 1970s into mid-2014, U.S. commercial crude oil inventories ranged between 275 mb and 400 mb. However, from mid-2014 into 2017, rising U.S. production led to a major increase in stockpiles.
Quarterly Energy Comment (March 13, 2018)
by Bill O’Grady
The Market
Over the past quarter, oil prices have ranged from a low of around $56 to a high of $66 per barrel.
Prices remain elevated, supported by OPEC production discipline and solid global oil demand.
Prices and Inventories
Inventory levels remain elevated but have clearly declined from last year’s peak.
Quarterly Energy Comment (December 15, 2017)
by Bill O’Grady
The Market
Oil prices have recovered strongly from the mid-summer lows. It appears we are establishing a new trading range between $55 and $60 per barrel.
This recovery was mostly caused by a steady decline in U.S. domestic crude oil inventories, a weak dollar and OPEC output discipline. We expect OPEC to maintain output restrictions until the Saudis price their partial IPO of Saudi Aramco sometime in 2018.
Quarterly Energy Comment (July 18, 2017)
by Bill O’Grady
The Market
Oil prices peaked in March around $55 per barrel. There have been a series of lower highs and lower lows, as shown by the lines on the chart.
This obvious downtrend has led to a general bearish tone to the market. We don’t necessarily share that level of pessimism; as we will show below, dollar weakness and falling inventories are supportive for oil prices. On the other hand, there are legitimate concerns that Saudis may reverse production restrictions after next year’s initial public offering for Saudi Aramco.
Daily Comment (June 8, 2017)
by Bill O’Grady, Kaisa Stucke, and Thomas Wash
[Posted: 9:30 AM EDT] Welcome to Super Thursday!
Today, there is a slew of geopolitical events that may have an impact on global markets. In Europe, the ECB will hold a press conference about current and future policy decisions. In the U.S., former FBI Director James Comey testifies to the Senate Committee about Trump’s influence in the Russia investigation. In the U.K., there are parliamentary elections to decide the prime minister.
The ECB has decided to hold rates at their current levels and maintain the current level of quantitative easing. Prior to the press conference, the ECB released a statement that left out the mention of possibly lowering interest rates in the future. The market has interpreted this as a signal that the ECB is willing to exit the stimulus program. As mentioned yesterday, the ECB has cut its inflation forecast and revised its GDP forecast higher. During the press conference, Mario Draghi added that he expects monetary policy to remain the same for an extended period of time, even after the stimulus program ends. He went on to say that increased momentum in the Eurozone economy shows that risks to the global outlook were broadly balanced, but the momentum has not translated into stronger inflation dynamics. Draghi warned that global macroeconomic developments still present downside risk and that the ECB is prepared to increase asset purchases if the outlook were to become less favorable or financial conditions become inconsistent. After the press conference, the euro depreciated against the dollar.
With the release of former FBI Director Comey’s statement that Trump asked him to “lift the cloud” of the investigation by publically stating that Trump was not personally under investigation, Comey’s testimony today could prove to be a bit anti-climactic. The primary market worry would be that enough information will emerge to further distract the Trump administration from other goals. We do note that Senate GOP leaders are looking at a health care bill; reports suggest that McConnell will give it a few weeks and, if nothing is done, tax issues will be taken up. Tax cuts are what the market is mostly concerned over so if the Senate can move forward then it probably means equities will at least hold at current levels.
The other major item today is the British election. Polls are scattered, with some late polls showing a dead heat, while others show a 10% lead for the Tories. Our expectation is a Conservative win but no major pickup in seats and thus no expanded mandate. This isn’t a great outcome but it probably doesn’t move the financial markets.
U.S. crude oil inventories unexpectedly rose 3.3 mb compared to market expectations of a 3.5 mb draw.
This chart shows current crude oil inventories, both over the long term and the last decade. We have added the estimated level of lease stocks to maintain the consistency of the data. As the chart shows, inventories remain historically high but have been declining. We note that, as part of an Obama era agreement, there was a 1.7 mb sale of oil out of the Strategic Petroleum Reserve. This is part of a $375.4 mm sale (or 8.0 mb) done, in part, to pay for modernization of the SPR facilities. International agreements require that OECD nations hold 90 days of imports in storage. Due to falling imports, the current coverage is near 140 days. Taking that into account, the build was a less ominous 1.7 mb.
As the seasonal chart below shows, inventories are usually well into the seasonal withdrawal period. This year, that process began early. Although the actual level of stockpiles remains quite high, we are seeing stock declines at a rather rapid pace. Assuming a similar drop from this year’s peak of 566.5 mb at the end of March, we will end up at 505 mb by late September. In fact, current inventory levels have already declined more than the seasonal trough, which is supportive. As a result, last week’s rise is something of an anomaly; we would not be surprised to see declines resume next week.
Based on inventories alone, oil prices are overvalued with the fair value price of $37.17. Meanwhile, the EUR/WTI model generates a fair value of $53.24. Together (which is a more sound methodology), fair value is $47.34, meaning that current prices are below fair value. Inventory levels remain a drag on prices but the oil market seems to be ignoring the impact of dollar weakness. Our position has been that oil prices are in a range between $45 and $55 per barrel and, accordingly, oil is attractive at current levels. The worries about OPEC shattering over Qatar appear to us to be misplaced. The cartel has managed to maintain relations with members at war before. A bigger risk is that a conflict develops that disrupts flows. It’s not highly likely, but it is more likely than OPEC expanding output based on tensions with Qatar.