Analyzing the oil supply/demand glut
In analyzing both the supply/demand imbalance of oil, and to a lesser extent natural gas, what still befuddles both expert professionals, as well as casual observers are both the speed and the intensity with which the price of global crude oil dropped from $100 a barrel at mid-year 2014 to the low $40s by the end of January 2015.
Although leading energy observers foresaw neither the sheer volume of the price drop, nor the speed with which it occurred, there are several key reasons that now stand out in hindsight. Most amazingly, these caused a perfect storm of simultaneity that added to the dislocation that these critical factors caused.
Leading global economic predictions overstated 2014 world demand by as much as between 5 to 10%. They vastly exaggerated China’s growth at a time of regime change that substituted cost-effectiveness and huge population displacement from agrarian to metropolitan consumer sectors for the sake of balanced economics. China’s new maximum leader, Xi Jinping, stopped unneeded mass housing building and has introduced a rational national budget balance that has reduced Beijing’s annual growth from 7.5% to a rate probably exceeding little more than 5.5% for 2016.
?Compounding this prediction was the unpredictable shrinkage of the European Community, traditionally comprising 20% of the world’s estimated annual gross domestic product of goods and services totaling near $60 trillion in the past few years.
While even economically leading European nation Germany was barely on the plus side in 2014, Europe’s overall economic balances could change for the worse rather than improve this year.
?The so-called BRIC nations (Brazil, Russia, India and China), lauded so strongly a decade ago as world stimulators, are being heavily dragged down by both Brazil’s Petrobas offshore drilling downturn, and oil- and natural gas-dependent Russia’s developing deep recession.
All-in-all, world oil/natural gas demand by these shortfalls and others show little signs of turnaround during 2015’s first half.
The supply side overlap to overestimated demand can be summed up by: a) The U.S. hydraulic fracturing (fracking) miracle that added as much as 1.5 million additional barrels a day to the world’s oil production volume last year and dramatically impacted supply; b) Saudi Arabia’s defense of its 9-10 million barrels per day export volume and world market supremacy, as well as the faster-than-expected production recovery by Iraq, Libya, Nigeria and other turmoil-infected nations able to exceed their quotas by as much as 10%; c) Not to be minimized is the impact of renewables (solar, wind, geothermal, etc.) and the substantial productivity generated by more effective “auto mileage” and the wide gamut of energy utilization by all aspects of industrial, commercial and residential usage. This includes major strides imposed by government agencies’ edicts as well as consumers restraining their energy usage.
With the global projections for 2015 not expected to exceed worldwide GDP by more than 2% at best, only the sharp cutback of overall U.S. oil production, which had tripled in the last five years, will bring world prices back into the $70 per barrel range by midyear. Barring major geopolitical outbursts encompassing hard-pressed Russia, Iran and Venezuela, whose budgets are almost totally dependent on oil and natural gas, only the downward pressure on supply will substantially increase prices as mid-year 2015 arrives with a $60 a barrel average the most to be expected for the world as a whole by the end of the year.
Rising U.S. oil prices await
Despite the bounce-off-the-floor of $42-per-barrel lows in late January, no serious global oil price increases will occur until American oil and natural gas producers aggressively reverse their expansion plans for now and cutback production in the months ahead. Severe cutbacks in drilling rigs already indicate steps in that direction.
As the energy landscape now stands, total global daily production is surging at 93 million barrels a day, while U.S. oil inventories, centralized in Cushing, Okla., have reached their highest level ever and are growing daily. International daily usage is estimated at 90 million barrels a day.
Simultaneously, despite a temporary growing glut, America’s active 140-plus refineries have expanded their capacity by one-third onsite in the past quarter century and are increasingly expanding their exports of various oil derivatives (diesel fuel, gasoline, heating oil, jet fuel, etc.) that are exempt from the 1974 oil embargo. This ruling forbade overseas crude oil shipments, except to Canada, which subsequently transshipped excess U.S. crude in the rare cases that “gluts” had appeared in the last 40 years.
Currently, 70% of NAFTA partner Mexico’s gasoline is dependent on U.S. refineries. Additionally, light condensate oil and such derivatives as butane have been given the U.S. Energy Agency permission to circumvent the overall embargo.
Saudi Arabia and its OPEC allies such as United Arab Emirates, Qatar and Kuwait, are producing and exporting at full capacity. The same is true of Russia, Iran and Venezuela – countries trying to compensate for some of their budget deficits, originally built on $100 per oil barrel, by straining their productive capacity to the fullest.
While showing no intention of cutbacks to improve prices, which were opposed by “swing factor” Saudi Arabia at the last OPEC meeting at Vienna last November, the Saudis are able to maintain maximum “profitable” production and exports since they maintain an excessive monetary reserve estimated at more than $1 trillion.
With American-based major oil producers such as Exxon Mobil, Conoco Phillips, Shell and BP, as well as technical service giants Halliburton, Schlumberger and Baker Hughes significantly cutting back capital expenditures and employment, higher future oil prices will depend primarily on U.S. drilling and overall hydraulic fracking diminution.
Any price increase projections by analysts or pundits are strictly speculative at this time. Higher prices by midyear will totally depend on dissipation of the worldwide glut and the subsequent shortages that will develop there.
Kinder Morgan conundrum
While President Barack Obama has made major upgrading of America’s infrastructural system of pipelines, bridges and dams a critical aspect of his final two years in the Oval Office, he has imposed equal importance on the need for more effective climatological restraint.
The latter is resulting in more restrictive measures taken by the Environmental Protection Agency in regards to excessive CO² generation and the release of methane into the atmosphere. This, the EPA claims, can be traced back to the geological turbulence supposedly caused by “hydraulic fracturing” and the further atmospheric climatic disturbance of both fracking and massive pipeline restructuring.
While there may be no particular connection between infrastructural redevelopment and further steps toward “climatological purity,” there is a growing segment of scientists, geologists and lobbying groups that are taking adverse positions against further unearthing of America’s development of natural resources with the Keystone XL pipeline (which Obama recently vetoed) symbolic of such reaction.
At this writing, Ed Kinder, the pipeline mastermind behind a private business approach to America’s world-leading future in oil, natural gas and a massive broadening of exported oil derivatives by the 140-plus U.S. refineries needing cost-effective and rapid access to the shale-developed oil and natural gas resources, is stymied by the EPA’s priority in ever-tightening regulations.
Even with domestic and foreign crude oil continuing at substantially lower prices, hydraulic fracking will accelerate even if reduced to a slower pace and limited to well-financed major energy conglomerates. Even the eventual investment value of “midstream” piping systems will not be negatively affected by the upstream excavation price calamities since their financial value is based on fees on the volume of flow coursing through their systems.
Piping system leaders such as Kinder Morgan are anxious to get on with this modernization and materiel upgrading since they know that growing energy traffic will be maintained at least at the current level no matter how the price structures finally play out this year.
U.S. oil inventories have reached their highest level ever and are growing daily.