Using Comparative Inventory to Bet Against the Oil Market Art Berman Labyrinth Consulting Services, Inc. MacroVoices Live Vancouver January 19, 2019 Labyrinth Consulting Services, Inc. Slide 1 artberman.com
2018 Oil-Price Collapse and Previous Collapses WTI found a Bottom: Range Boundaries Probably ~$45 - $55 for Near-Medium Term 2018 Oil-Price Collapse Appears to be Over For Now $220 WTI increased +$10.06 (24%) from Dec 24 low of $42.53 to Jan 10 high of $52.59 $210 WTI low price was $42.53 on Dec 24, a -44% decline from Oct 5 high of $76.41 $200 Smaller percentage drop than 2008 or 2014-15 but similar rate of decline (-$0.97/day) $190 Oct 3 $80 $79 $180 Jun 29 $76.41 62.24 $78 $77 Price Collapse WTI Change WTI Change % Number of Days Rate ($/day) % < 200-Mo Avg $170 $76 May 21 $74.15 2018 -$33.88 -44% 35 -$0.97 -33% $75 $74 $72.13 $160 2014-2015 -$62.81 -59% 63 -$1.00 -25% $73 2008 -$111.42 -77% 112 -$0.99 -4% $72 $150 $71 $70 $145.29 $70 Jan 26 Mar 23 $69 $140 $68 $66.14 200 $65.88 $67 $66.08 $130 WTI Futures Price $66 Month $65 WTI $64 $120 Avg $65.01 $64.75 $/Barrel $63 $107.26 $62 Aug 15 Jun 4 Futures CL1 Price ($/barrel) $110 -77% $61 $62.06 $60 Apr 6 $59 Price $100 $60.12 $58 $59.20 Mar 7 $57 200-Week Jan 10 $90 Feb 9 $56 $76.41 $55 Avg $52.59 $54 $80 200 -59% $53 $52.31 $52 Week $70 $61.43 200-Month $51 $50 $59.32 Avg Avg $60 $65.99 $49 $50.51 $48 $52.31 $47 $50 -44% $46 $45 $40 $44 $44.45 $42.53 $43 $42 $30 $33.87 $41 $42.53 $40 Dec 24 $20 $26.21 $39 $38 $10 $37 Source: Quandl & Labyrinth Consulting Services, Inc. $36 Source: Quandl & Labyrinth Consulting Services, Inc. $35 $0 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 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 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? • Labyrinth Consulting Services, Inc. Slide 2 artberman.com
Comparative Inventory and Oil Price 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 $125 $52.32 current front-month price ~$5 under-valued $120 $115 270 April 2015 $110 239 $105 Last time CI was at current Feb 2017 $100 212 level, WTI was $57.81 220 $95 Crude + Refined Product Comparative Invneory (mmb) $90 2014 $85 170 mid-cycle OPEC+ $80 $75.34 2018 mid-cycle price Output $75 price $61 WTI Price ($/barrel) $72.36 Cut $70 120 $65 WTI Spot Price $57.81 $60 $61.28 (LHS) $53.34 $55 $50.01 Nov $50 2014 70 Mar $45 Oil 40 2018 38 $40 Over-Supply $35 20 $30 Positive C.I. $25 $20 -30 $15 Oil Under-Supply -36 $10 Negative C.I. $5 Source: EIA & Labyrinth Consulting Services, Inc. -80 $0 Jul-14 Dec-14 Jul-15 Dec-15 Jul-16 Dec-16 Jul-17 Dec-17 Jul-18 Dec-18 Jun-14 Aug-14 Sep-14 Oct-14 Nov-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Aug-15 Sep-15 Oct-15 Nov-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Aug-16 Sep-16 Oct-16 Nov-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Aug-17 Sep-17 Oct-17 Nov-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Aug-18 Sep-18 Oct-18 Nov-18 Jan-19 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? • Labyrinth Consulting Services, Inc. Slide 3 artberman.com
Comparative Inventory-Price Yield Curve Yield Curve Mid-Cycle Price Marginal barrel or mmBtu price at the 5-year average needed to maintain supply Supply Less Certain Supply More Certain Higher Price Needed to Lower Price Needed to Maintain Supply Maintain Supply - + Comparative Inventory (C.I.) Source: Aperio Energy Research & Labyrinth Consulting Services, Inc. • 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. Labyrinth Consulting Services, Inc. Slide 4 artberman.com
Changing Yield Curves and Excursions from the Yield Curve WTI comparative inventory (C.I.) has been increasing since May 2018 and is now 16 mmb more than the 5-year average $120 December avg price of $49.52 was under-valued by ~$9 based on C.I. - Price yield curve $115 $110 C.I. for this chart based on EIA monthly $105 stock data that measures somewhat $100 different components than weekly data routinely shown $95 Source: EIA & Labyrinth Consulting Services, Inc.- Aperio Energy Research Jan 2014 - June 2017 Early 2014 $90 Market July 2017 - 2018 $85 Optimism $80 2014-June 2017 Yield Curve $75 May Sep Aug Mar-June 2015 Min $70 Oct False Optimism (-34, $65 Dec '16 - Apr '17 $69.98) Production-Cut Optimism $60 $59 Nov $55 Dec $50 (16, $49.52) $45 July 2017-2018 WTI Price ($/barrel) $40 Yield Curve $35 $30 Late 2015-Early 2016 $25 Crude + products comparative Inventory (C.I.) Millions of Barrels Market Pessimism $20 -50 0 50 100 150 200 250 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). • Labyrinth Consulting Services, Inc. Slide 5 artberman.com
Mechanics of Comparative Inventory 2018 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus 1,200 $300 Inventories 1,150 $250 (LHS) Ivnetories & 5-Year Average of Crude Oil + Products (mmb) Mar Feb 2017 1,100 2016 $200 OPEC+ 1,050 Cut WTI Price ($/barrel) $150 1,000 Comparative Inventory Spring (RHS) $100 5-Year Avg 2015 950 False (LHS) Price Rally $50 Late Sept 900 Mar 2018 2018 C.I. Surplus $0 850 Nov C.I. Deficit 2014 Source: EIA & Labyrinth Consulting Services, Inc. 800 -$50 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr-18 Oct-18 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. • Labyrinth Consulting Services, Inc. Slide 6 artberman.com
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