FRACTIONAL FLOW

Posts Tagged ‘China

The Oil Price – Some (Mar-16) Observations and Thoughts

In this post I present some selected parameters I monitor which may help understand near term (2-3 years) oil price movements and levels.

It has been my understanding for some time that the formulations of fiscal and monetary policies also affects the commodities markets. Changes to total global debt has and will continue to affect consumers’/societies’ affordability and thus also the price formation of oil.

I have earlier asserted;

Any forecasts of oil (and gas) demand/supplies and oil price trajectories are NOT very helpful if they do not incorporate forecasts for changes to total global credit/debt, interest rates and developments to consumers’/societies’ affordability.

  • The permanence of the global supply overhang could be prolonged if consumption/demand developments soften/weakens and it is not possible to rule out a near term decline.
  • Recent demand/consumption data for total US petroleum products supplied show signs of saturation which provides headwinds for any upwards movements in the oil price.
  • While prices were high many oil companies went deeper into debt in a bid to increase production of costlier oil. Many responded to the price collapse with attempts to sustain/grow production in efforts to moderate cash flow declines and thus ease debt service.
  • If the forward [futures] curve moves from a present weak contango (ref also figure 02) to backwardation, this would erode support for the oil price.
  • Some suggest that growth from India will take over as China’s growth slows.
    Looking at the data from the Bank for International Settlements (BIS) there is nothing there that now suggests India (refer also figure 05) has started to accelerate its debt expansion. The Indian Rupee has depreciated versus the US dollar, thus offsetting some of the stimulative consumption effects from a lower oil price.

The recent weeks oil price volatility has likely been influenced by several factors like short squeezes, rumors and fluid sentiments.

Near term factors that likely will move the oil price higher.

  • Continued growth in debt primarily in China and the US. {This will go on until it cannot!}
  • Another round with concerted efforts of the major central banks with lower interest rates and quantitative easing.

And/or

  • A tightening in the global oil demand/supply balance from whatever reasons.

I also believe that D E M A N D (consumption) developments now are more important than widely recognized and that demand/consumption developments will play a major factor in as from when oil prices will regain support to move to a sustainable higher level.

I now hold it 90% probable that the oil price will enter a new leg down, and that the low in January 2016 could be taken out.

Recently the total US petroleum demand growth had two components

  1. Growth in consumption, mainly driven by the collapse of the oil price
  2. Noticeable growth in petroleum stocks (primarily crude oil) since late 2014 driven by a favorable contango.

The combined effects from these grew annualized US petroleum demand by 1.3 Mb/d relative to January 2014 (ref also figure 01). US consumption growth has now stalled, which may suggest saturation from the lower oil price is about to be reached.

Figure 01: The chart above shows development in annualized [52 weeks moving averages] US total petroleum consumption [blue line] and storage build [red line] both rh scale. The black line, lh scale, shows development in the oil price (WTI). Consumption and storage developments are relative to Janaury 2014 (baseline). NOTE, changes in consumption and stocks are stacked, thus the red line also shows total annualized changes in demand.

Figure 01: The chart above shows development in annualized [52 weeks moving averages] US total petroleum consumption [blue line] and storage build [red line] both rh scale. The black line, lh scale, shows development in the oil price (WTI). Consumption and storage developments are relative to Janaury 2014 (baseline).
NOTE, changes in consumption and stocks are stacked, thus the red line also shows total annualized changes in demand.

In the last 6 months total US petroleum consumption developments have stalled and there are some relative changes amongst the products (ref below).

A weakened contango (ref also figure 02) will likely reduce demand for storage.

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The Oil Price and EMEs growth in Credit and Petroleum Consumption since 2000

In this post I present a closer look at the credit growth for 6 Emerging Market Economies (EME) together with the developments in their and the net oil exporters petroleum consumption for the period 2000 to 2014.

The 6 EMEs are; Brazil, China, India, Indonesia, Malaysia and Thailand.

  • Where did the lion’s share of growth in global petroleum consumption end up since 2000?
  • What was the likely mechanism/vehicle that allowed for this?

This post is an update and expansion to my post “Changes in Total Global Credit Affect The Oil Price”

  • The credit growth for the EMEs was strong in absolute and relative terms (also as a percentage of GDP) since 2009. As from 2013 the EMEs credit growth slowed (decelerated).
  • The EMEs credit growth gained momentum as the big central banks lowered interest rates and started Quantitative Easings (QE), refer also figures 02 and 04.
  • As the EMEs enter debt saturation (little room left on their balance sheets {little remaining quality collateral} to take on more credit/debt) expect this to affect their consumption and their potential to pay for higher priced oil.
  • Potential for continued [global] credit growth will for some time become one of the vital factors that define the sustainable ceiling for the oil price.
  • Demand is what one can pay for. In other words, demand is monetary in nature. Credit acts as money and adds to aggregate demand.
    Credit growth also made it possible to bid up and pay for higher priced oil during the recent years.
  • If the oil price, for whatever combination of reasons, moves to a sustainable higher level, it should be expected that those who are left with limited/no access to more credit will reduce their consumption/demand for oil.

Figure 01: The stacked areas in the chart show the growth in petroleum consumption for the 6 EMEs and the net oil exporters from 2000 to 2014 [2000 has been used as a baseline]. Total growth for the 6 EMEs are shown by the black dotted line. The red dashed line shows the change in total global petroleum consumption since 2000. [These are shown versus the right axis]. The development in the oil price is shown by yellow circles connected by a grey line versus the left axis.

Figure 01: The stacked areas in the chart show the growth in petroleum consumption for the 6 EMEs and the net oil exporters from 2000 to 2014 [2000 has been used as a baseline]. Total growth for the 6 EMEs are shown by the black dotted line.
The red dashed line shows the change in total global petroleum consumption since 2000. [These are shown versus the right axis].
The development in the oil price is shown by yellow circles connected by a grey line versus the left axis.

The chart above shows several interesting developments.

  • The strong growth in petroleum consumption from the 6 EMEs and net oil exporters since 2000.
  • Early in the previous decade the OECD countries also grew their petroleum consumption as a response to central banks’ lowered interest rates that allowed for further credit expansion [kicking the can until there is no more road left].
  • A shift occurred post the Global Financial Crisis (GFC) in 2008.
    The 6 EMEs and net exporters outbid OECD (and others) for a portion of their petroleum consumption.
    (This is shown by the growth in global petroleum consumption [the red dotted line] which since 2008 did not fully meet growth in consumption from the 6 EMEs and net oil exporters.
    The 6 EMEs and the net oil exporters increased their total petroleum consumption with 17.1 Mb/d (from 26.7 Mb/d in 2000 to 43.7 Mb/d in 2014), while global consumption grew by 15.2 Mb/d to 92.1 Mb/d.
  • OECD reduced its petroleum consumption from 48.0 Mb/d (2008) to 45.1 Mb/d (2014).
    OECD countries slowed and/or reversed credit expansion (deleveraged [default is one way to deleverage]) and introduced austerity measures in a bid to manage their credit overhang.
  • The net oil exporters (countries/regions) that saw noticeable growth in their petroleum consumption in the period are; Canada, Mexico, Colombia, Ecuador, Venezuela, Azerbaijan, Kazakhstan, Norway, Russian Federation, Turkmenistan and the regions Middle East and Africa. There are other small net oil exporters like Denmark, Trinidad&Tobago which had small changes to their petroleum consumption.
  • Indonesia became a net petroleum importer as of 2003 and Malaysia as of 2011.

The net oil exporters spent some of the increased revenues from higher priced oil for social programs to improve living standards and as leverage for increased investments to sustain and/or grow oil supplies (which require energy!) for what looked like a sustained growth in demand/consumption that would support a lasting high oil price.

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Written by Rune Likvern

Saturday, 5 September, 2015 at 19:01

World Crude Oil Production and the Oil Price, August 2015

In this post I present some of my observations and thoughts about the developments in the oil price, supply and demand, exchange rates (relative to the US dollar), petroleum stocks and what near term factors are likely to influence the oil price.

  • The price of oil (and other commodities) appears to have been influenced by the central banks’ policies post the GFC of 2008 (Global Financial Crisis, primarily the Fed as the US dollar is the world’s major reserve currency) with low interest rates which allowed for growth in total global credit/debt.
  • As the Fed confirmed its end of QE3 (QE; Quantitative Easing) program by the fall of 2014, the oil price started to decline. This decline became amplified by an oversupply resulting from years of debt fueled high capital expenditures by the oil companies to develop supplies of costlier oil for the market to meet expectations of growth in consumption.
  • With the end of QE3 the US dollar rapidly appreciated versus most other major currencies, which offset some of the decline in the oil price in most economies (oil is priced in US dollar), the exceptions being the US and China (which has its currency pegged to the US dollar).
  • Demand and consumption of oil (actual data so far only for the US) responded to the price collapse by some growth. However the world’s growth has not been sufficient to close the gap between supplies and consumption, thus sustaining a downward pressure on the oil price.
  • The oil price collapse motivated oil companies with low variable costs (OPEX) to compensate some of the loss of cash flow by increasing their production (volumes), thus creating a dynamic where growing supplies went looking for demand.
  • The oil price collapse and a period with a favorable contango spread incentivized a strong build in stocks and as stocks remain at elevated levels, it may take some time before stocks return to “normal” levels.

Figure 1: The chart above shows the developments in the oil price [Brent spot, black line. The red line is the smoothed one year moving average] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy relies heavily upon. The financial system is virtual and thus highly responsive. NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

Figure 1: The chart above shows the developments in the oil price [Brent spot, black line. The red line is the smoothed one year moving average] and the time of central banks’ announcements/deployments of available monetary tools to support the global financial markets which the economy relies heavily upon. The financial system is virtual and thus highly responsive.
NOTE: The chart suggests some causation between FED policies and movements to the oil price. The US dollar is the world’s major reserve currency and most currencies are joined to it at the hip.

The big unknown is how demand will develop. A global economy struggling with too much debt while running out of quality collateral will at some point experience the drags from growth in the services of the growing total debt. Continued growth in global credit/debt will increasingly be directed towards the services of the growing total amount of debt (kicking the can down the road as the economic productivity from additional credit/debt diminishes).

  • As growth in global credit/debt slows, comes to halt or deleveraging sets in, this will affect demand and prices, also for oil.

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