Using Comparative Inventory to Bet Against the Oil Market Art - - PowerPoint PPT Presentation

Slide 1 Labyrinth Consulting Services, Inc. artberman.com

Using Comparative Inventory to Bet Against the Oil Market

Art Berman Labyrinth Consulting Services, Inc. MacroVoices Live Vancouver January 19, 2019

Slide 2 Labyrinth Consulting Services, Inc. artberman.com

2018 Oil-Price Collapse and Previous Collapses

• The 2018 oil-price collapse appears to be over for now.
• WTI low price was $42.53 on Dec 24, a -44% decline from Oct 5 high of $76.41.
• Smaller percentage drop than 2008 or 2014-15 but similar rate of decline ($0.97/day).
• WTI increased +$10.06 (24%) from Dec 24 low of $42.53 to Jan 10 high of $52.59.
• WTI found a bottom: range boundaries probably ~$50 - $65 for near-medium term.
• Was this price collapse a correction? Was it a reaction to broader market sell-offs?
• Or was it more fundamental?

$145.29 $33.87 $107.26 $44.45 $61.43 $26.21 $76.41 $42.53 $52.31 $59.32 $65.99 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120 $130 $140 $150 $160 $170 $180 $190 $200 $210 $220 1/3/07 5/3/07 9/3/07 1/3/08 5/3/08 9/3/08 1/3/09 5/3/09 9/3/09 1/3/10 5/3/10 9/3/10 1/3/11 5/3/11 9/3/11 1/3/12 5/3/12 9/3/12 1/3/13 5/3/13 9/3/13 1/3/14 5/3/14 9/3/14 1/3/15 5/3/15 9/3/15 1/3/16 5/3/16 9/3/16 1/3/17 5/3/17 9/3/17 1/3/18 5/3/18 9/3/18 1/3/19 5/3/19 9/3/19 $/Barrel

200-Week Avg 200-Month Avg

WTI Futures Price

Source: Quandl & Labyrinth Consulting Services, Inc.

2018 Oil-Price Collapse Appears to be Over For Now WTI low price was $42.53 on Dec 24, a -44% decline from Oct 5 high of $76.41 Smaller percentage drop than 2008 or 2014-15 but similar rate of decline (-$0.97/day)

• 77%
• 59%
• 44%

62.24 Price Collapse WTI Change WTI Change % Number of Days Rate ($/day) % < 200-Mo Avg 2018

• $33.88
• 44%

35

• $0.97
• 33%

2014-2015

• $62.81
• 59%

63

• $1.00
• 25%

2008

• $111.42
• 77%

112

• $0.99
• 4%

$66.14 $59.20 $60.12 $65.88 $62.06 $72.13 $64.75 $74.15 $65.01 $76.41 $42.53 $52.59 $50.51 $52.31 $66.08 $35 $36 $37 $38 $39 $40 $41 $42 $43 $44 $45 $46 $47 $48 $49 $50 $51 $52 $53 $54 $55 $56 $57 $58 $59 $60 $61 $62 $63 $64 $65 $66 $67 $68 $69 $70 $71 $72 $73 $74 $75 $76 $77 $78 $79 $80 1/2/18 1/16/18 1/30/18 2/13/18 2/27/18 3/13/18 3/27/18 4/10/18 4/24/18 5/8/18 5/22/18 6/5/18 6/19/18 7/3/18 7/17/18 7/31/18 8/14/18 8/28/18 9/11/18 9/25/18 10/9/18 10/23/18 11/6/18 11/20/18 12/4/18 12/18/18 1/1/19 1/15/19 1/29/19 CL1 Price ($/barrel)

200 Week Avg 200 Month Avg

WTI Futures Price

Source: Quandl & Labyrinth Consulting Services, Inc.

Jan 26 Jun 29 May 21 Oct 3 Mar 23 $70

WTI found a Bottom: Range Boundaries Probably ~$45 - $55 for Near-Medium Term WTI increased +$10.06 (24%) from Dec 24 low of $42.53 to Jan 10 high of $52.59

Aug 15 Dec 24 Jun 4 Apr 6 Mar 7 Feb 9 Jan 10

Slide 3 Labyrinth Consulting Services, Inc. artberman.com

Comparative Inventory and Oil Price

• Oil prices are relatively high when Comparative Inventory (C.I.) is negative (deficit) & prices

are relatively low when C.I. is positive (surplus).

• Many observers and analysts believe that current oil prices are “too low.”
• The last time C.I. was at current ~38 mmb level, WTI was $58/barrel vs $53/barrel today.
• Oil price is somewhat under-valued but not “too low.”
• Why isn’t this generally understood?

239 212 40 38

• 36

$72.36 $53.34 $57.81 $61.28 $75.34 $50.01

• 80
• 30

20 70 120 170 220 270 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115 $120 $125 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Crude + Refined Product Comparative Invneory (mmb) WTI Price ($/barrel) Source: EIA & Labyrinth Consulting Services, Inc.

Oil Over-Supply Positive C.I. WTI Spot Price (LHS)

April 2015 2014 mid-cycle price Feb 2017

Oil Under-Supply Negative C.I. Mar 2018

Nov 2014 OPEC+ Output Cut

Last time comparative inventory (C.I.) was at current 38 mmb level, WTI was $57.81 $50.01 avg price for wk ending Jan 11 $7 - $8 under-valued $52.32 current front-month price ~$5 under-valued

2018 mid-cycle price $61

Last time CI was at current level, WTI was $57.81

Slide 4 Labyrinth Consulting Services, Inc. artberman.com

Comparative Inventory-Price Yield Curve

• Inventory is part of supply. Demand is consumption plus movements to & from inventory.
• A cross-plot of C.I. vs price results in a yield curve.
• The comparative inventory yield curve uses C.I. instead of maturity & oil price instead of

yield.

• The concept is identical.
• The yield curve crosses the y-axis at the 5-year average.
• That is the “mid-cycle” price, the market-clearing price of the marginal barrel needed to

maintain supply.

• The market is short on oil price when C.I. is positive, or more than the 5-year average, & long

when C.I. is negative or less than the 5-year average.

• The slope of the yield curve reflects the market’s sense of urgency about supply.

Comparative Inventory (C.I.) Supply Less Certain Supply More Certain

Mid-Cycle Price Marginal barrel or mmBtu price at the 5-year average needed to maintain supply

Yield Curve

Higher Price Needed to Maintain Supply Lower Price Needed to Maintain Supply

Source: Aperio Energy Research & Labyrinth Consulting Services, Inc.

• +

Slide 5 Labyrinth Consulting Services, Inc. artberman.com

Changing Yield Curves and Excursions from the Yield Curve

• From 2014 through mid-2017, the yield curve had a steep slope & mid-cycle WTI price was

~$75/barrel.

• This was inherited from C.I. - price expectations in the 2011-2014 period of high oil prices.
• As C.I. approached the 5-year average, markets realized that things had changed.
• In mid-2017, markets devalued oil prices because of perceived tight oil supply and costs.
• The resulting yield curve is flatter and has a mid-cycle WTI price of ~$61/barrel.
• There are obvious excursions from the yield curve—it is not a mathematical regression

because markets are subject to sentiment.

• The excursions are as important as the conforming data (behavioral economics).

$20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115 $120

• 50

50 100 150 200 250

Mar-June 2015 False Optimism Late 2015-Early 2016 Market Pessimism Dec '16 - Apr '17 Production-Cut Optimism Early 2014 Market Optimism

Crude + products comparative Inventory (C.I.) Millions of Barrels

Source: EIA & Labyrinth Consulting Services, Inc.- Aperio Energy Research

WTI Price ($/barrel)

Jan 2014 - June 2017 July 2017 - 2018

WTI comparative inventory (C.I.) has been increasing since May 2018 and is now 16 mmb more than the 5-year average December avg price of $49.52 was under-valued by ~$9 based on C.I. - Price yield curve

July 2017-2018 Yield Curve 2014-June 2017 Yield Curve

C.I. for this chart based on EIA monthly stock data that measures somewhat different components than weekly data routinely shown

Nov Sep Aug

(16, $49.52)

$59 Dec May Min Oct

(-34, $69.98)

Slide 6 Labyrinth Consulting Services, Inc. artberman.com

• $50

$0 $50 $100 $150 $200 $250 $300 800 850 900 950 1,000 1,050 1,100 1,150 1,200 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19

WTI Price ($/barrel) Ivnetories & 5-Year Average of Crude Oil + Products (mmb) Source: EIA & Labyrinth Consulting Services, Inc.

Comparative Inventory (RHS)

Inventories (LHS)

Nov 2014 OPEC+ Cut Spring 2015 False Price Rally Mar 2016

5-Year Avg (LHS)

Late Sept 2018 Mar 2018

2018 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus C.I. Deficit C.I. Surplus

Feb 2017

Mechanics of Comparative Inventory

• Comparative Inventory = Current Inventory Level minus 5-Year Average of Inventory Levels.
• Inventories consist of crude oil plus a basket of price-critical refined products.
• These include gasoline and diesel.
• When inventories exceed the 5-year average, C.I. is in surplus and vice versa.

Slide 7 Labyrinth Consulting Services, Inc. artberman.com

• The 2014-2015 oil-price collapse coincided with the end of C.I. deficit that had characterized 2011-

2014.

• Inventories climbed relative to the 5-year average resulting in a massive C.I. surplus by early 2016.
• WTI prices fell below $30/barrel.
• The ”false” oil-price rally to $60 in the spring of 2015 was because of a short-term drop in C.I.
• The surplus began to decline in the 2nd half of 2016 (reduced capital flows in 2015) & decline began

in earnest after the OPEC+ production cut in early 2017.

• C.I. went into deficit in March 2018. Capital flows and oil prices increased to $75 by October.
• The 2018 oil-price collapse coincided with a change from C.I. deficit to surplus in late September.
• That surplus continues to increase.

Comparative Inventory Explains WTI Price History since 2014

$0 $20 $40 $60 $80 $100 $120 750 800 850 900 950 1,000 1,050 1,100 1,150 1,200 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 WTI Price ($/barrel) Ivnetories & 5-Year Average of Crude Oil + Products (mmb) Source: EIA & Labyrinth Consulting Services, Inc.

WTI Price (RHS)

Inventories (LHS)

Jun 2014 Nov 2014 C.I. Surplus Began Feb 2016 Nov 2016 OPEC+ Cut Announced Jun 2015 Jun 2016 Jun 2017 Late Dec 2018

5-Year Avg (LHS)

Late Sept 2018 C.I. Surplus Began Mar 2018 C.I. Deficit Began

2018 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus C.I. Deficit C.I. Deficit C.I. Surplus C.I. Surplus

• $50

$0 $50 $100 $150 $200 $250 $300 800 850 900 950 1,000 1,050 1,100 1,150 1,200 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 WTI Price ($/barrel) Ivnetories & 5-Year Average of Crude Oil + Products (mmb) Source: EIA & Labyrinth Consulting Services, Inc.

Comparative Inventory (RHS)

Inventories (LHS)

Nov 2014 OPEC+ Cut Spring 2015 False Price Rally Mar 2016

5-Year Avg (LHS)

Late Sept 2018 Mar 2018

2018 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus C.I. Deficit C.I. Surplus

Feb 2017

Slide 8 Labyrinth Consulting Services, Inc. artberman.com

Comparative Inventory has Explained Price Cycles Since Data Was Available

• Nine price cycles defined by comparative inventory vs WTI price from 1995-2019.
• U.S. inventory data first publicly available in 1990.
• This history shows that negative C.I. does not always result in high oil prices.
• This is best illustrated by the 1995-2004 cycle in which markets expressed little supply

urgency despite strongly negative C.I. (beware of outages with just-in-time supply).

• A similar situation exists with natural gas markets today in the U.S.
• The important take-away is that the current perception of low-supply urgency suggests that

price may never return to 2011-2014 levels unless that perception changes.

• Markets are ruthless & hate to over-pay.

$0 $20 $40 $60 $80 $100 $120 $140 $160

• 150.00
• 100.00
• 50.00

0.00 50.00 100.00 150.00 200.00 250.00 300.00

Nine Price Cycles Defined by Comparative Inventory vs WTI Price from 1995-2019

1995-2004 2005-NOV 2006 DEC 2006-2007 2008 2009 2010-2011 2012-2013 2014-2017 2018

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

Source: EIA & Labyrinth Consulting Services, Inc.- Aperio Energy Research 2017- 2018 2014-17 1995-2004 2008 2014-17 2012-13 2006- 2007 2010- 2011 2005- 2006 $0 $10 $20 $30 $40 $50 $60 $70 $80 $90 $100 $110 $120

• 150
• 100
• 50

50 100 150 200 250 300

Comparison of three price cycles defined by comparative inventory vs WTI price from 1995-2019

1995-2004 2014-June 2017 2018-19

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

Source: EIA & Labyrinth Consulting Services, Inc.- Aperio Energy Research

1995-2004 July 2017-2018 2014- June 2017

Slide 9 Labyrinth Consulting Services, Inc. artberman.com

More History Explained by Comparative Inventory

• Until about 2004, price fluctuations were low-amplitude compared to C.I. changes. Much

smaller deficits after 2007 resulted in much higher prices.

• Markets became concerned about flat supply in the face of increasing demand from Asia.
• Geopolitical concerns arose about Middle Eastern oil supply with death of Saudi king, Iraq

war & Iran’s nuclear program. Also unrest in Nigeria, U.S. hurricanes Katrina & Rita, and refinery outages in the North Sea and U.S. contributed to supply concerns (we think there are geopolitical risks today!).

• Oil prices increased despite growing C.I. surplus.
• Demand destruction partly responsible for a price collapse in 2006-2007.
• 130
• 80
• 30

20 70 120 170 220 270 320 1/6/95 1/6/96 1/6/97 1/6/98 1/6/99 1/6/00 1/6/01 1/6/02 1/6/03 1/6/04 1/6/05 1/6/06 1/6/07 1/6/08 1/6/09 1/6/10 1/6/11 1/6/12 1/6/13 1/6/14 1/6/15 1/6/16 1/6/17 1/6/18 1/6/19 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 Comparative Inventory (mmb) WTI Price ($/barrel) Source: EIA & Labyrinth Consulting Services, Inc.

Over-Supply (Positive C.I.) Under-Supply (Negative C.I.) WTI Price (LHS) 2006-2007 Price Collapse

2006-07 oil-price collapse completely different from 2008-09, 2014-15 & 2018 Price rally was geopolitical during period of comparative inventory (C.I.) over-supply Later collapses began during C.I. under-supply & largely independent of outages

Slide 10 Labyrinth Consulting Services, Inc. artberman.com

$0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115 $120 $125 $130 $135

• 200
• 150
• 100
• 50

50 100 150 200 2014- Jun 2017 2011-2013 2010-2011 Jul 2017-2018

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

Source: EIA STEO & Labyrinth Consulting Services, Inc.

July 2016 (+157,$44.95) 2014-Mid 2017 Yield Curve

Late 2015-Early 2016 Market Pessimism Early 2017 OPEC+ Optimism Late 2013-early 2014 Market Optimism Nov '14 OPEC Mtg Spring 2015 Optimism

Nov '18 Current Yield Curve $72 Mid-Cycle Price Jul '14 (-54, $106.77) Sep '18 (-52, $78.29)

December average Brent price of $57.36 was ~$13 under-valued based on comparative inventory yield curve value of $65 - current front-mo price is $60.30

Nov Dec '18 July 2014 & Sept 2018 have same C.I. but $29 price difference.

C.I. Just As Useful With Brent

• OECD minus U.S. is the measure for C.I. vs Brent calibration.
• Different data frequency & reliability compared to WTI.
• Shape of Brent yield curve suggests lower supply urgency than for WTI.
• Mid-cycle price is ~$73/barrel.
• September 2018 C.I. minimum almost identical to July 2014 C.I. minimum but there is a $29

price difference. That is a measure of oil-price devaluation & effect of yield curve slope.

• December average Brent price of $57.36 was approximately $13 under-valued based on C.I.

yield curve – y-axis intercept.

Slide 11 Labyrinth Consulting Services, Inc. artberman.com

Betting Against the Market Using C.I.

• All 3 major excursions—Mar-Jun 2015, Late 2015-Early 2016 & Dec 2016-Apr 2017—were

recognized as excursions as they were happening.

• The September – October 2018 & November – December 2018 were also recognized as excursions.
• Symmetry to latest excursions: December 28 price of $45.26 as undervalued as Oct 5 price of

$75.34 was overvalued.

• The market is not wrong during excursions: uncertainty leads to price discovery.
• The key to betting against the market is having the calibration to know what is happening & to

what level price is likely to return.

$20 $25 $30 $35 $40 $45 $50 $55 $60 $65 $70 $75 $80 $85 $90 $95 $100 $105 $110 $115 $120

• 50

50 100 150 200 250

Crude + products comparative Inventory (C.I.) Millions of Barrels

Source: EIA , HSNO & Labyrinth Consulting Services, Inc.- Aperio Energy Research

Mar-June 2015 False Optimism

Early 2014 Market Optimism Late 2015-Early 2016 Market Pessimism WTI Price ($/barrel)

Dec '16 - Apr '17 Production-Cut Optimism

WTI ~$5 under-valued at Jan 11 wkly avg price of $50.01 based on C.I. yield curve Comparative inventory (C.I.) increased +4.62 mmb & is 38 mmb > 5-yr avg

Jan 11 Jan 2014 - June 2017 July 2017 - 2018 Jan 4 C.I. MIN May 4

C.I. WTI 1/11/19 38.37 $50.01 1/4/19 33.76 $47.00 Change 4.62 $3.01 5/4/18

• 36.20

68.38 Change 74.58

• $18.37

C.I. is current crude + products stock level minus 5-yr avg

$55 Extreme Market Pessimism

WTI ~$14 over-valued at $75.34 wk ending Oct 5 WTI ~$8 under-valued at $47.00 wk ending Jan 4

Slide 12 Labyrinth Consulting Services, Inc. artberman.com

The World is Over-Supplied With Oil

• The world was over-supplied with oil in 2018 and forecasts indicate over-supply in 2019 and 2020.
• Over-supply has characterized 4 of the last 5 years.
• Production-consumption balance has been increasing since 2007.
• Over-supply has been the norm since the Financial Collapse.
• The deficit in 2017 was because of OPEC+ production cuts of 1.8 mmb/d & production deficit was
• nly -0.5 mmb/d.
• Oil market balance is mostly about supply and producer behavior. When capital flows to E&P

companies, they over-produce.

• Demand changes slowly (except during serious recessions) but supply can change quickly.

Slide 13 Labyrinth Consulting Services, Inc. artberman.com

Comparative Inventory is Central For Understanding Oil Markets

• Oil markets are extraordinarily complex because oil is the master resource.
• It therefore, underlies and connects all elements of the global economy including the human

psychology behind markets.

• The C.I. yield curve seems to integrate much of that complexity into two factors—price &

comparative inventory.

• The approach is not a solution but it provides outstanding calibration.

Slide 14 Labyrinth Consulting Services, Inc. artberman.com

• Oil prices are likely to move toward $60 WTI & $70 Brent along an uneven pathway.
• There will be opinion leaders who proclaim a return to $90-$100 prices in the relatively near term.
• Don’t believe them.
• Proclamations about peak demand, the dominance of electric vehicles & renewable energy will
• persist. Neither believe the time frames nor that living standard will be more-or-less as it is today.
• Humans have never gone from a higher to a lower density source of energy.
• That path will be traumatic.
• Capital flows define oil market cycles. Supply and demand proceed naturally from capital flows.

The Path Forward

$26.21 $76.41 $42.53 $52.07 63.14 78.97 66.09 55.09 34.23 18.43 27.42 65.17 57.16 42.99 37.03 10 20 30 40 50 60 70 80 90 $0 $20 $40 $60 $80 $100 $120 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 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19

Oil Volatility Index NYMEX Oil Futures ($/Barrel)

Extreme Frequency & Magnitude of Volatility Changes Since Oct 19 Road to higher oil prices may be less certain than in previous price cycles Sentiment about broader economy will have even more effect than usual

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

NYMEX WTI (LHS) Oil-Price Volatility (RHS)

Nov 23 2018 Feb 11 2016 Feb 24 2016 Jun 7 2017 Feb 11 2016 Feb 5 2015 Nov 29 2016 Dec 18 2017 Oct 3 2018 Dec 24 Oct 19 2018