The U.S. Over-Supply of Oil is Ending Pay-It-Forward Network Art - - PowerPoint PPT Presentation

Slide 1 Labyrinth Consulting Services, Inc. artberman.com

The U.S. Over-Supply of Oil is Ending

Pay-It-Forward Network

Art Berman Labyrinth Consulting Services, Inc. November 17, 2017

Slide 2 Labyrinth Consulting Services, Inc. artberman.com

The U.S. Over-Supply of Oil is Ending

• Comparative inventory (C.I.) has been dramatically reduced in 2017.
• Levels have fallen 165 mmb since February and are now approaching the 5-year average for the first

time in nearly 3 years.

• The causes of the U.S. inventory drawdown are clear: increased exports of crude oil and greater

domestic consumption.

239 213 159 48

• 50

50 100 150 200 250 10 20 30 40 50 60 70 80 90 100 110 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17

Comparative Inventory (mmb) WTI Price ($/barrel), Stocks & 5-Year Average Stocks (mmb)

The U.S. Over-Supply of Oil is Ending

Source: EIA & Labyrinth Consulting Services, Inc.

WTI Price (LHS) Positive C.I. (RHS) Negative C.I. (RHS) Stocks (LHS) 5-Year Avg Stocks (LHS)

Oil Over-Supply Oil Under-Supply

Slide 3 Labyrinth Consulting Services, Inc. artberman.com

• An interpreted yield curve that correlates C.I. and WTI price is developed by cross plotting the same

data without the time dimension.

• The yield curve may provide price solutions to inventory reduction assumptions in the near term.
• If C.I. continues to fall at the 9-month average of 4 mmb/week, oil prices may be approximately $67

per barrel by the end of December.

• If C.I. falls at the 8 mmb/week average since late September, WTI could approach levels not seen

since before the price collapse in late 2014.

Comparative Inventory Yield Curve Predicts $67+ WTI Prices By January 2018

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115

• 50 -40 -30 -20 -10

10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250

The U.S. Over-Supply of Oil Is Ending Comparative Inventory Has Fallen 165 mmb in 2017

Comparative Inventory (C.I.) Millions of Barrels WTI Price ($/barrel)

Source: EIA & Labyrinth Consulting Services, Inc.

$40 $55

Mar-June 2015 False Optimism 2014-2017 Data Mid-cycle price (5-year average) Late 2015-Early 2016 Pessimisim (Cushing > 80% Capacity) Early 2017 OPEC Production-Cut Optimism

Nov 3 2017 Mid-Feb 2017 165 mmb

Yield Curve

48 mmb

Price response will be more pronounced going forward because

• f increasing curvature
• f the Yield Curve

1 2 3 4

• Nov. 2014

OPEC decision not to cut production

Nov 10 2017

Slide 4 Labyrinth Consulting Services, Inc. artberman.com

Crude Oil Exports and the Brent-WTI Spread

• Crude oil exports for the first half of 2017 averaged 0.8 mmb/d but rose to 1.8 mmb/d in September

and October.

• Increased exports now average 7-12 mmb/week and contribute substantially to reduced inventory

levels.

• Higher export levels correlate with the increased spread between Brent and WTI prices that began in

late July.

• Traders can sell U.S. crude oil overseas at less than international prices but at levels higher than

domestic pricing allows. Record exports of 2.13 mmb/d occurred during the week ending October 27.

• Exports have averaged ~1 mmb/d in 2017—almost double levels in 2016.

1.1

1 2 3 4 5 6 7 8 9 0.5 1 1.5 2 2.5 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Net Crude Oil Imports (mmb/d) Crude Oil Exports (mmb/d)

Crude Oil Exports Back Above 1 mmb/d for Week Ending November 10

Crude Oil Exports & 4- Week Average (LHS) Net Crude Imports & 4- Week Average (RHS)

Source: EIA & Labyrinth Consulting Services, Inc.

Annual Avg Annual Avg 908 kbpd 485 kbpd 7.44 mmbpd 7.10 mmbpd Exports 423 kb/d more than in 2016 & account for > 6mmb/week

2.1 mmb/d Oct 27

Crude Oil Exports Have Averaged 0.9 mmb/d in 2017

1.49 1.98 1.80 1.92 2.13 0.87 1.13 $7.24

• $2
• $1

$0 $1 $2 $3 $4 $5 $6 $7 $8 0.5 1 1.5 2 2.5 3 3.5 4 1/1/16 2/1/16 3/1/16 4/1/16 5/1/16 6/1/16 7/1/16 8/1/16 9/1/16 10/1/16 11/1/16 12/1/16 1/1/17 2/1/17 3/1/17 4/1/17 5/1/17 6/1/17 7/1/17 8/1/17 9/1/17 10/1/17 11/1/17 Brent-WTI Price Spread ($/barrel) Crude Oil Exports (mmb/d)

Crude Exports Increased +0.3 mm/d (+1.8 mmb/week) From Previous Week But ~1 mmb/d Less Than September-October Levels

Source: EIA & Labyrinth Consulting Services, Inc.

Weekly Crude Oil Exports & 4-Week Average (LHS) Brent-WTI Price Spread & 4-Week Average (RHS)

Brent-WTI spread reached $7.24 last week

Slide 5 Labyrinth Consulting Services, Inc. artberman.com

Crude Oil Exports and the Brent-WTI Spread

• Tight oil production levels, crude oil quality and U.S. refinery blending needs are behind the WTI

discount to Brent price.

• Most U.S. refineries are designed for international grades of oil like Brent which is heavier and

contains more sulfur than WTI.

• The U.S. has had a surplus of light sweet oil since the tight oil boom began, and the Brent-WTI

spread reached almost $30/barrel in September 2011 as a result.

• Middle East fear premium has been an important factor since June 2017.
• 0.02

$7.24 5 10 15 20 25 30

• $2.00
• $1.00

$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 5/6/16 5/20/16 6/3/16 6/17/16 7/1/16 7/15/16 7/29/16 8/12/16 8/26/16 9/9/16 9/23/16 10/7/16 10/21/16 11/4/16 11/18/16 12/2/16 12/16/16 12/30/16 1/13/17 1/27/17 2/10/17 2/24/17 3/10/17 3/24/17 4/7/17 4/21/17 5/5/17 5/19/17 6/2/17 6/16/17 6/30/17 7/14/17 7/28/17 8/11/17 8/25/17 9/8/17 9/22/17 10/6/17 10/20/17 11/3/17 Cusihing Crude Oil Comparative Inventory (mmb) Brent Premium to WTI Crude Oil Price ($/barrel)

Brent Premium to WTI At $7.24/barrel Caused By Middle East Fear Premium & WTI Transport Constraints (Now Easing Somewhat)

Qatar restored diplomatic relations with Iran Aug 24 Qatar ransom to Iraqi Shi'ite militants June 5 Kurdish Referendum Sept 25 Source: EIA & Labyrinth Consulting Services, Inc.

Brent Premium to WTI (LHS) Cushing Comparative Inventory (RHS)

Saudi Purge Oct 24

Slide 6 Labyrinth Consulting Services, Inc. artberman.com

Structural Problems Getting WTI to East Coast Refineries

• The spread decreased to about $2.25 with the advent of rail shipments of WTI to East Coast

refineries, and associated reduced light oil imports.

• The transport cost was reasonable when oil prices were $100 per barrel but lower oil prices after

2014 resulted in a progressive decline in rail shipments.

• East Coast refiners increasingly relied again on imported light oil mostly from West Africa to blend

with heavier grades of oil.

• A surplus of tight oil returned as production recovered as a result higher oil prices in 2016 and 2017.

Surplus supply caused discounted WTI prices, and the recent increase in the Brent-WTI spread.

• Some of excess oil has been exported in recent weeks but the price spread persists because import

levels are so far unaffected.

Slide 7 Labyrinth Consulting Services, Inc. artberman.com

Increased Domestic Consumption is 2nd Cause of Inventory Drawdowns

• Consumption reached a 10-year record of 21 mmb/d during the summer of 2017.
• August 2017 consumption was 300 kb/d more than in August 2016 and that difference accounts for

more than 2 mmb/week of incremental inventory reduction.

• In fact, the increase in consumption that began in January coincided with the beginning of

comparative inventory reduction that in February.

21.3 19.8

• 100
• 50

50 100 150 200 250 300 18.0 18.5 19.0 19.5 20.0 20.5 21.0 21.5 22.0 22.5 1/3/14 3/3/14 5/3/14 7/3/14 9/3/14 11/3/14 1/3/15 3/3/15 5/3/15 7/3/15 9/3/15 11/3/15 1/3/16 3/3/16 5/3/16 7/3/16 9/3/16 11/3/16 1/3/17 3/3/17 5/3/17 7/3/17 9/3/17 11/3/17

Crude Oil + Products Comparative Inventory (mmb) Csonumption (Product Supplied mmb/d)

U.S. Refined Product Consumption Fell -1.6 mmb/d This Week

Consumption (LHS) Comparative Inventory (RHS)

Source: EIA & Labyrinth Consulting Services, Inc.

4-Week Avg Annual Avg 20.1 mmb/d

21 mmb/d

from 21.3 to 19.8 mmb/d (-11 mmb/week): The Main Factor in Comparative Inventory Increase

Beginning of Consumption Increase Beginning of Inventory Reduction

Slide 8 Labyrinth Consulting Services, Inc. artberman.com

Greatest Portion of Consumption is From Transportation

• U.S. travel data seems to contradict consumption data.
• VMT growth has slowed since mid-2017.
• Declining Vehicle Miles Traveled (VMT) mid-2005 through mid-2014.
• High gasoline prices and 2007-2008 Financial Collapse most probable causes.
• Strong VMT recovery with lower gasoline prices with oil-price collapse.
• Recent decline in VMT probably because of higher gasoline prices.
• Or, are consumption and travel data explained by late summer hurricanes?

$1.00 $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 10 10.1 10.2 Jan-00 Jun-00 Nov-00 Apr-01 Sep-01 Feb-02 Jul-02 Dec-02 May-03 Oct-03 Mar-04 Aug-04 Jan-05 Jun-05 Nov-05 Apr-06 Sep-06 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 Nov-15 Apr-16 Sep-16 Feb-17 Jul-17 Gasoline Price (September 2016 $/gallon) Thousands of Vehicle Miles (VMT) Per Person

Vehicle Miles Traveled (VMT) Growth is Slowing With Higher Gasoline Prices

Source: U.S. DOT, U.S. Dept of Labor Statistics, EIA & Labyrinth Consulting Services, Inc

VMT Growth (LHS) Gasoline Price (RHS)

Rapid VMT Growth With Lower Gasoline Prices Slowing Growth

$1.90 $2.00 $2.10 $2.20 $2.30 $2.40 $2.50 $2.60 $2.70 $2.80 $2.90 9.6 9.65 9.7 9.75 9.8 9.85 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Gasoline Price (September 2016 $/gallon) Thousands of Vehicle Miles (VMT) Per Person

Vehicle Miles Traveled (VMT) Growth is Slowing With Higher Gasoline Prices

Source: U.S. DOT, U.S. Dept of Labor Statistics, EIA & Labyrinth Consulting Services, Inc

VMT Growth (LHS) Gasoline Price (RHS)

Slowing Growth

Slide 9 Labyrinth Consulting Services, Inc. artberman.com

The Possible Downside of Consumption

• Continued high U.S. consumption is the only area of concern for sustained higher oil prices.
• September and October consumption were considerably lower than in August.
• It is normal for consumption to decline after the summer driving season but the magnitude of the

decline is disturbing.

• October consumption was 1.5 mmb/d (45 mmb/month) less than in August.
• That is more than the total August-to-January seasonal decline during the previous year (1.4 mmb/d,

42 mmb/month).

• So far in November, consumption has rebounded.

20.5

• 1.5
• 1
• 0.5

0.5 1 1.5 2 2.5 19.0 19.5 20.0 20.5 21.0 21.5 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Year-Over-Year Product Supplied (mmb/d 4-Week Average) Product Supplied Monthly Average (mmb/d)

October U.S. Consumption Was 1.5 mmb/d (-45 mmb) Less Than Than In August But Has Rebounded in November

Source: EIA & Labyrinth Consulting Services, Inc.

Monthly Average (LHS) YOY 4-Wk Average (RHS) October 2017 Oct. 2016 August 2017 August 2016 January 2017

• 1.4

mmb

• 1.5

mmb

• Nov. 2017

Slide 10 Labyrinth Consulting Services, Inc. artberman.com

Consumption Will Decrease If Gasoline Prices Increase With Higher Oil Prices

• Consumption becomes a greater concern if oil prices increase as much as I expect because gasoline

prices will increase accordingly–consumption and gasoline price are negatively related.

• Higher oil price means higher gasoline price and lower consumption.
• $70 WTI will result in almost a $1/gallon price increase above the current average retail price of

$2.53 and that may depress consumption.

Slide 11 Labyrinth Consulting Services, Inc. artberman.com

Critical Balance Between Supply & Consumption of Crude + Refined Products

19.2 21.3 19.8

13.3 13.5

2 4 6 8 10 12 14 16 18 19 19 20 20 21 21 22 22 23 23 1/6/17 1/20/17 2/3/17 2/17/17 3/3/17 3/17/17 3/31/17 4/14/17 4/28/17 5/12/17 5/26/17 6/9/17 6/23/17 7/7/17 7/21/17 8/4/17 8/18/17 9/1/17 9/15/17 9/29/17 10/13/17 10/27/17 11/10/17 11/24/17

Field Production + Net Crude + Product Imports (mmb/d) Product Supplied (mmb/d)

Last Week Domestic Consumption Decreased 1.5 mmb/d (11 mmb/week)

Source: EIA & Labyrinth Consulting Services, Inc.

Supply (RHS) Consumption (LHS) 4-week avg. 4-week avg.

Field Production, Net Crude + Product Imports Increased 0.17 mmb/d (1.2 mmb/week) Critical Balance Between Supply & Consumption of Crude Oil + Refined Products

Source: EIA & Labyrinth Consulting Services, Inc.

Supply (RHS) Consumption (LHS) 4-week avg. 4-week avg.

• Although the large decrease in domestic consumption appears to be rebounding, this must be

carefully watched since it has been the main driver of inventory reduction.

• Net crude + product imports are also important as refinery intakes increase following hurricane

disruption.

• The Brent-WTI spread will largely determine crude export levels that have given a major boost to

inventory reduction since the spread widened in late June.

• The upcoming OPEC meeting on extending production cuts will be a critical driver of momentum for

in coming weeks.

Slide 12 Labyrinth Consulting Services, Inc. artberman.com

I am cautiously bullish on oil prices despite the recent price pullback

• NYMEX prices exceeded $55 for 1st time since July 2015, fell back to $55 & are now vacillating.
• Traders recently unwound some long positions then reversed last Friday and reversed again Monday, and

reversed again today. Sideways movement based on sentiment-based non-substantive “news.”

• I am cautiously bullish on prices because the Brent-WTI spread has increased and favors higher U.S. exports.
• Domestic consumption is the key driver for inventory reduction and despite uncertainty, looks strong…for now.
• OPEC’s cuts have taken substantial oil off the market & Saudi Arabia will keep some level of cuts in force

regardless of disunity in OPEC.

• Expectation for U.S. production growth is exaggerated.
• For the near term, I anticipate prices rising perhaps more slowly than I did a few weeks ago.
• Peak demand is a fad concern for the medium term.
• Biggest concern is whether higher oil prices will dampen economic growth.
• $1.2
• $1.0
• $0.8
• $0.6
• $0.4
• $0.2

$0.0 $0.2 $0.4 $40 $42 $44 $46 $48 $50 $52 $54 $56 $58 $60 10/2/17 10/4/17 10/6/17 10/8/17 10/10/17 10/12/17 10/14/17 10/16/17 10/18/17 10/20/17 10/22/17 10/24/17 10/26/17 10/28/17 10/30/17 11/1/17 11/3/17 11/5/17 11/7/17 11/9/17 11/11/17 11/13/17 11/15/17 11/17/17 11/19/17 Font-to-Back (CL1 - CL7) Month Contract Spread ($/barrel) Front-Month CL1 Futures Contract Price ($/barrel)

Traders Vacillate on WTI Bets Nov. 6 - Nov. 20

Contango RHS (Futures > Spot Price) Backwardation RHS (Spot > Futures Price) WTI CL1 Price (LHS) Nov 6

Source: Bloomberg, Quandl, EIA & Labyrinth Consulting Services, Inc. CL1 - CL7 CL1 - CL7

Nov 17 Front-to-Back CL1-CL7 Futures Spreads Are in Slight Contago Nov 20

10 20 30 40 50 60 $40 $41 $42 $43 $44 $45 $46 $47 $48 $49 $50 $51 $52 $53 $54 $55 $56 $57 $58 $59 $60 11/1/16 11/15/16 11/29/16 12/13/16 12/27/16 1/10/17 1/24/17 2/7/17 2/21/17 3/7/17 3/21/17 4/4/17 4/18/17 5/2/17 5/16/17 5/30/17 6/13/17 6/27/17 7/11/17 7/25/17 8/8/17 8/22/17 9/5/17 9/19/17 10/3/17 10/17/17 10/31/17 11/14/17 Oil Price Voliatility Index NYMEX WTI Futures Price ($/barrel)

$55 NYMEX Upper Range Boundary Exceeded 1st Time Since July 2015

Source: EIA, Bloomberg & Labyrinth Consulting Services, Inc.

$45 Per Barrel $55 Per Barrel

OPEC Cuts $49.83 Avg Price

Testing $58 Resistance But Losing Ground Lately NYMEX Price (LHS) Oil-Price Volatility (RHS)