Crude Oil on the Slippery Slope

By: Andrew_McKillop

OPEC NEWS IS NO NEWS
Oil output by the producer states in the cartel is falling, with the largest loss by Iran, for highly obvious reasons - the western embargo - but not at all so obvious, Iran's large cutback in crude oil exports, due to the embargo, will be joined by a significant fall in Iranian imports of refined products, especially middle distillates and gasoline. For the more-than-somewhat oversupplied and nearby European market for these products, the price impact can only be downward, with the leading indicator being stocks and refinery runs in Europe. Refinery runs, already low, and stocks which are high, will likely go further down and up with European refiners trying to recoup some of their losses by exporting more gasoline to the US, impacting US crude demand for refining.

Industry data shows that oil production by Iran fell below 3 million barrels a day in the month of June but that has only one real impact: OPEC quota overruns will be a little less extreme than they were, as the cartel still produces far more than the "theoretical limit" set by present quotas for the 11 member states who say they abide by them, of around 30 million barrels a day (Mbd). The quota ceiling has featured in OPEC meetings for month after month. Total output, today, is off the highs of about 31.5 Mbd in March, but still well above 30 Mbd. The world's No 1 NOPEC producer, Russia, is producing at record rates not seen since Soviet heydays of the early 1980s.

Put another way, Iran's significant fall in total export supply to European states, the US, Japan and South Korea, but not to India and probably also not China, may help OPEC maintain a semblance of quota discipline, but real world supply is still chasing global oil demand. Down.

The two key figures are total world demand, and the growth rate of world demand: unusually, both the cartel and the OECD's energy watchdog agency the IEA are saying nearly the same things. Both are forecasting that world demand in 2012 may struggle to attain a year-round day average of 89.5 Mbd. Three months ago, it was possible to scenarize and forecast sufficient demand recovery for world demand to average 90 Mbd through 2012, in turn implying a growth of demand on a 12-month base, from late 2011 to late 2012 of close to or more than 1 Mbd.

DEMAND GROWTH: WHAT DEMAND GROWTH?
Trailing the IEA and its constant cuts in forward estimates for global demand growth, until recent weeks, OPEC is now forecasting that world oil demand growth will fall to 0.8 Mbd for the full year, but even this now looks like pious hope. Inside the cartel, it looks different: cutting back the growth number could put more pressure on producers to trim their production a little nearer their quota volumes. Quotas themselves may however and in fact soon need cutting, more especially when we take OPEC's most recent forecast that for calendar year 2013 world oil demand will average only 89.5 Mbd.

This means that through 2012-2013 we would have a perfectly flat trend line for demand, with a few ripples for winter heating and the summer motoring and air travel season in the northern hemisphere, eaten away by falling demand by industry worldwide. For OPEC the polite way to talk about this outlook is “considerable uncertainties.” These are likely to come in jumbo doses from Asia: Chinese and Indian oil demand growth is certainly not what it used to be, and coming news may be really bad for the oil boomers betting for higher prices.

Using IEA and other data we find that outside the OECD group of countries, oil-fired electric power production is still alive and taking a little more than 2 billion barrels a year, roughly 6.6% of world oil demand. This sector is most surely under threat by the shakeout in world solar and windpower, which for solar power has seen 14 of the world's largest producers file for bankruptcy since the start of the year. Prices are now giveaway, stocks of surplus equipment are high - and installation in Asia can be rapid. The oil impact will be sure and certain: down.

Another major segment that features low in analyst reports and high in Asian oil demand- global marine and shipping oil demand - also takes a little more than 2 billion barrels a year, and was growing at a rock solid 7% a year, until 2009. Linked closely to Asian manufacturing and export trade, this segment is set to flat line, and may then seriously shrink, not only due to declining export growth out of Asia, but also to non-oil energy alternatives for shipping.

On the supply side the NOPEC pile is growing fast. Global oil and gas finds include Anadarko's epic-sized gas find off Mozambique in 2011 and emerging, possibly large-sized oil and gas finds off Madagascar, Tanzania and Kenya. After West African offshore therefore, with its likely or posssible trans-Atlantic ocean link for oil-bearing source rock we now have East Africa edging up as a new producer region. African oil and gas export potential is set to grow - and grow.

BROKERS OUT TO LUNCH
In a strange disconnect with reality, several large and midsize brokers and financial players are stolidly playing their customers' funds for an oil price surge. Trying to save the bull market for oil, as Goldman Sachs will tell, is already expensive but for MF Global, and most recently Peregrine Finance (trading as PFGBest) the results can be disastrous - for anybody who put money into their hands. These players, and their financial and business media friends are now obliged to talk up anything that talks up oil: the recent Norway oil trades union strike was milked for what it could but soon ended feeble in its price impact, leaving serious geopolitical tension and strife as the only real hope. Outside the Middle East, where Arab Spring-2 is always possible, inside the Gulf petro-states, China is agains flexing its muscles on the offshore zone around disputed islands in the East China Sea, and the dispute between North and South Sudan drags on, but times are frankly not looking good for the oil boomers.

Oil bulls can of course still flip the coin and guess that US oil or refined product stocks may have staged a recovery, this week. What the bulls call "surprise builds", like US gasoline stocks last week tend to show up all too often, but "suprise builds" may unfortunately (for them) start becoming the norm. Stock trends, including strategic oil stocks in Asia are those to watch for real signals of how world demand is shaping up - and in Asia surprise stock builds and oil demand growth shrinkage could very likely be emerging.

Erosion of the funds they have available to throw at the oil market, betting for a price jump may soon be the decisive factor driving a break of broker ranks. The result of this on leading markets like Nymex and the ICE will be a short period of "hectic trading" during which oil prices get slashed down to the $70 - $80 region where fundamentals say they belong. After that, the flak will fly as brokers and their capital partners reveal their recent losses.

By Andrew McKillop

Contact: xtran9@gmail.com

Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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