2 reports show supply-demand imbalance is likely to linger

Source: Nathanial Gronewold and Jenny Mandel, E&E reporters • Posted: Tuesday, June 16, 2015

Two reports on the global oil markets published this week pointed to extended bearishness in the business of hydrocarbons.

International energy industry monitors report that global crude oil demand is up. But so is production as the Organization of the Petroleum Exporting Countries pumps ever-greater quantities of oil. Thus, no major change in the direction of oil pricing is expected.

Rather, figures suggest oil prices may fall again in the summer as temporary factors supporting a market lift clear and the global flow of oil hits a market that may be unable to take it all in.

Refinery runs are lower now in much of the world, but this is giving traders the illusion of greater tightness in the supply-demand equilibrium, say analysts at the International Energy Agency (IEA). Though fuels production looks different, the oil not being refined is rapidly filling stockpiles and waterborne storage.

Yesterday, IEA posted its latest global Oil Market Report. The overall picture painted by the report closely aligns with that of an annual statistical review of global energy that oil and gas supermajor BP PLC published this week: generally slow oil demand growth meeting faster increases in supplies.

IEA economists believe that a recent rise in international Brent crude oil prices, now at nearly $65 per barrel, is related to maintenance delays and shutdowns at refineries. Raging violence and warfare in the Middle East is another factor in the recent price run-up. It suggests the effect may be short-lived.

“Product imbalances have likely been a key factor behind recent oil price strength, and that particular source of support might soon wane as long-delayed refineries eventually reach full production,” the agency said.

IEA’s latest view also came with a slight upward revision in oil demand growth for 2015, as analysts there see the lower prices encouraging more consumption. The new figures see global oil demand expanding in 2015 by 1.4 million barrels per day.

Supplies are rising to easily match the demand increase. IEA says that OPEC is at its highest output levels since August 2012, and producing 3 million barrels a day of crude more than where production for the bloc stood last year. Analysts also predict that oil production from countries that are not members of OPEC will rise by 1 million barrels a day in 2015.

Iran and Iraq both have publicly announced that they’d like to produce even more oil. Output has also risen a bit in Saudi Arabia.

BP sees world supplies surging in 2014

Adding to IEA’s assessment, BP released an annual energy study yesterday that showed world oil supplies last year grew by more than 2 million barrels per day — more than twice the 10-year average — led by strong production in the Americas.

2014 saw the U.S. increase its production of crude oil and natural gas plant liquids to a record high of 11.6 million barrels per day, passing the previous combined total record of 11.3 million barrels per day set in 1970, BP said.

With the inclusion of natural gas liquids along with crude in its accounting, BP said U.S. production passed that of Russia and Saudi Arabia, becoming the top producer for the first time since 1975.

Data from the U.S. Energy Information Administration (EIA), which tracks crude and NGL production separately, reflect that U.S. production of crude oil and lease condensate (a super-light form of crude) reached 8.7 million barrels per day last year to Russia’s 10.1 million barrels per day and Saudi Arabia’s 9.7 million barrels per day.

Adding NGL production to those totals put U.S. production at the top with 11.6 million barrels per day, followed by Saudi Arabia at 11.5 million barrels per day and Russia at 10.8 million barrels per day, according to EIA.

Experts suggest that U.S. crude oil production could reach the November 1970 record of 10 million barrels per day of regular crude this year, depending on prices (EnergyWire, March 20).

A demand slump

BP’s review generally paints 2014 as a year of steady production growth matched with weak demand, led by the United States, where oil production rose by 1.6 million barrels per day, “by far the largest growth in the world, and the first time any country has increased its production by more than 1 [million barrels per day] for three consecutive years.”

The report notes that the previous two years saw U.S. production growth offset by outages elsewhere, many related to the disruptions of the Arab Spring events, but world crude prices started to sag last summer as crude stockpiles grew in the United States and elsewhere. When OPEC decided in November to maintain high crude production levels, that “broke the market’s back” and caused prices to drop to half their previous high.

While much attention has been focused on the production side of last year’s oil market story, BP points to the demand side as equally critical.

Developed economies last year continued a trend of shedding energy consumption while Chinese energy demand growth clocked in at 2.6 percent — a healthy measure by developed-country standards but a major disappointment compared with the 6.6 percent yearly growth it has averaged over the past 10 years.

Overall, energy demand growth last year slowed to 0.9 percent, BP said, the slowest since the late 1990s, except for during the financial crisis, despite the global economy growing by 3.3 percent, much as it did the year before.

The weakness lingers. Recent trade data shows China’s imports have shrunk.

The demand-supply imbalance that seems to be only rising is still taking its toll on drillers in the United States, though many companies are putting on a brave face.

At an annual conference held in Houston this week, hosted by the energy industry consultancy Bentek, Standard & Poor’s economist Beth Ann Bovino said that layoffs in the U.S. oil and gas sector have been “seven times what would be the 10-year average.” She said that U.S. manufacturing capacity would also very likely dip in 2015 as recent output increases have been directly connected with the U.S. shale oil boom that’s now unraveling.

BP traced the demand-supply difference partly to one-time weather conditions, but also to declining world energy intensity — a phenomenon the company expects will rebound in the near term but be part of the big-picture story over time, as developing economies stabilize at higher, but flatter, energy consumption rates.

Highlighting the importance of climate and environmental concerns along with market forces, BP Chief Economist Spencer Dale said that with recent advances in oil and gas technologies, “the issue is not whether we will run out of fossil fuels, but rather how we should use those ample reserves in an efficient and sustainable way.”

The British oil and gas giant is one of six European energy companies that called on world leaders to institute a carbon price during the United Nations climate talks in Paris later this year. In a presentation earlier this week, a Statoil official said his company and several competitors already integrate a fictitious carbon price into their project cost calculations in anticipation of global regulations.