Despite oil prices being somewhat depressed by the hype surrounding the Iran deal – which has repeatedly been debunked as not affecting supply until, at the earliest, the first quarter of next year – expect another large oil inventory draw to come.
It starts with the API inventory figures published Tuesday followed by Wednesday’s EIA report, which I expect to not only show an inventory draw of over 4 MMbbls again but continued declines in production. This is, in part, tied to growing demand in the U.S., but there are several other reasons we should discuss.
With the Iran deal, the consensus seems to believe that 600,000 bpd to 1 MMbpd could be added to the market next year. The exact figures are uncertain, but that range seems realistic.
But what the media is missing is the fact that demand will grow by over 1 MMbpd over that time frame. China, by opening up its refining markets to non-state run companies, will boost its demand by some 600,000 bpd alone. Further, natural production declines eat away at 4-5% of production each year. That means that the current 95 MMbpd of supply could see the erosion of 3-4 MMbblss in the next year.
Rising demand and natural decline more than offset the supply risks on Iran, yet the media misses that story. Between objectives pursued by the central bank and the warped media coverage, the investor class is ignoring underlying fundamentals and trading on hype.
One of the reasons I am sticking my neck out here is, I have studied how the media, as well as the puppeteers who pull the strings that shape our society, act in concert. The media is famous for spin, deception and distraction, creating what I have referred to as “selective perception.” They are in the process of diverting attention to Iran now to create the aura of overhang to depress oil prices.
At the same time, just as we saw last week, it creates a risk so that any positive news – such as the 4 million plus draw last week along with a 66,000 bpd drop in production – gets largely ignored.
And it seems as if traders do not even realize what is going on. Investors are being tricked into following media hype and central bank decisions instead of fundamentals. Case in point: technology and biotechnology have reached record highs in the face of deteriorating earnings and slowing economy, as geopolitical risks mount.
The second reason I believe both production and inventory will continue to decline is the fact that virtually all shale producers remain free cash flow (FCF) negative and Wall Street’s lifeline to support such a model is being cut. Swift Energy, in failing to raise funds through a bond deal, is a perfect example of what’s to come as we head into fall.
I recently confirmed through an industry contact that the amount of assets available for sale has increased dramatically from just 4 to 6 weeks ago. That is yet another sign of distress. I have maintained that, regardless of oil prices, this will mark the bottom in valuations for the E&P group in the near term as M&A accelerates from here on out.
Despite all these musings, where oil prices go will be highly dependent on how disciplined E&P companies are. If they fuel the concern of oil oversupply like Pioneer Resources did recently, by saying it will add two rigs per month when oil was back at $60, then prices won’t do anything.
The industry needs remove media hype or every negative issue will be amplified into falling prices. Further, if the Federal Reserve, in all its wisdom, decides to raise interest rates despite wide spread economic weakness and wage stagnation, that too will pressure oil further as the dollar remains strong. If, like many expect, the Fed stops the nonsense and moves toward another QE then oil will soar again.
The third reason I believe the U.S. supply and demand picture is about to turn brighter, despite attention now being put on distillate stocks, is the EIA itself. In the past, I have been critical of their forecasts, which I will admit isn’t easy, given that mistakes can literally cost trillions. And I still maintain that this entire oil crisis has been engineered through incorrect assumptions by both the EIA and IEA, willfully or not.
But recently the EIA stated that, within a quarter or two, it will improve its sample size of producers and start receiving producer data directly on a timelier basis. If this isn’t a precursor to a restatement of prior assumptions and forecasts, I don’t know what is. It’s coming for sure, especially when all eyes are on Iran now.