Every other week I post the Saturday Oil Report. I've provided links to recent reports at the end of this post. It appears that few people pay attention to these reports, but I don't really care. I cover the oil markets generally, including Chinese, U.S. and European demand, the financialization of oil prices, Saudi spare capacity, where we stand vis-a-vis peak oil, factors which are contributing to short-term price rises or declines, and problems with our flawed benchmark crudes (Brent, WTI). Those who run across these reports are free to disagree with my analyses. These readers are also free to be wrong
The Business Insider's Joe Weisenthal, who is not famous for his expertise about the oil markets, is surely among the countless millions of people with an interest in these markets who do not read my Saturday Oil Report. However, with the seasonal gasoline price rising earlier than usual during an election year, and with the economy just as shaky as ever, Weisenthal, like so many others, has become an instant expert on the oil markets.
In Here's The REAL Reason Gasoline Prices Have Been Surging In The US, Joe tries to convince us that good old Supply & Demand are pushing up oil prices, which pushes up gasoline prices. The picture is mixed, but Weisenthal's arguments are generally weak. So we must look elsewhere if we want to know why Brent has surged to over $125 per barrel.
Let's go through Joe's arguments using his graphs. I want to start out on a positive note. I agree with this—
But whenever the discussion turns to gas and oil, logic tends to die, and people start coming up with all kinds of bizarre explanations for what's going on — explanations such as the Bernanke's money printing, Obama's domestic energy policy, Obama's foreign policy, speculators, price gougers, and so on.
So we thought it would be a good time to just clear up some misconceptions, and explain what's really driving the price.
I also think it's a good time to clear up some misconceptions, including Joe's. He starts off by quoting BarCap's Miswin Mahesh and Amrita Sen along with a year-over-year demand graph and a graph of shut-in oil.
... Despite what looked like a rather well-supplied prompt market, the weakness in time spreads has abated. While the spate of cold weather in Europe has helped to normalise balances, in our view, it has really been the uptick in Asian oil demand that has helped to absorb the extra OPEC volumes.
Indeed, we believe that Asian and FSU [former Soviet Union] oil demand are growing at a faster pace than markets are currently pricing in.
That's what Mahesh and Sen believe. There's not much evidence to support it.
While US and European demand remains very weak, and as a result, the overall state of global oil demand may be nothing to write home about, equally, it is not declining, contrary to market expectations.
That's right, the state of global oil demand is nothing to write home about.
Further, while OPEC may be producing close to 31 mb/d, the high level of supply losses on the non-OPEC front have intensified. Output from Sudan, Syria and Yemen at a combined total of almost 1.2 mb/d has been compromised, while non-geopolitically based outages in the form of technical issues are also on the rise. As a result, while the extra OPEC volumes would have otherwise been a surplus at the margin, it has now become a necessity to simply maintain the status quo.
The Sudan (in the south) has stopped producing 350,000 barrels per day. The Sudan is a China supplier. See here and here.
If we believe the numbers for Yemen and Syria—before sanctions, Syria was exporting 140,000 barrels-per-day—the total amount of shut-in oil in those countries plus the Sudan amounts to about 850 thousand barrels-per-day, not 1.2 million as Mahesh and Sen claim. But Yemen is producing at just about half of its 250,000 barrel-per-day capacity, so the total for shut-in oil is more like 600,000 barrels-per-day, most of which comes from south Sudan.
More importantly, the first graph above does not show a rebound in global oil demand. In fact, demand growth was generally weak throughout most of 2011. The January uptick, which amounts to about 300,000 barrels-per-day year-over-year, is basically nothing. If we were looking at U.S. demand, that would be noise in the data. Mahesh and Sen are correct in noting that oil demand in Europe and the United States is very weak. China's demand growth (year-over-year) has slowed considerably.
If we look at Weisenthal's inventories graph, the case for tight global supply appears to get stronger, but it only appears that way.
It's not as though OECD oil demand, which mainly comes from Japan, the U.S. and Europe, has been surging lately, which might account for the drawdown in inventories if we lived in a world unlike the one we now inhabit. In fact, all these OECD economies are very weak, with Europe showing marked deterioration. The inventory level is less than 75 million barrels below the 5-year average, which is roughly equal to one day's global supply.
I could go on and on here, but I think you get the idea. The picture is mixed as I said above—that Sudan oil is shut-in—but Weisenthal's argument that Supply & Demand are driving the recent rise in the Brent price doesn't hold water. Joe finally gets to the heart of the matter in this lone sentence, which is meant to be dismissive.
Add in some kind of "fear" premium due to a possible war with Iran, and it's just not that hard to see why the price of a barrel of oil has surged like this.
Actually, so-called Iran fears and speculation in the trading pits based on these alleged fears appear to be the main reasons why Brent costs 15 dollars more than it did a month ago. Otherwise, I suspect the price would be drifting down as it was before this Iran brouhaha acquired a life of its own. And it seems to me that it is highly suspicious that just when the oil price threatened to fall below $100 per barrel because of weakening global demand, all of a sudden there was yet another bogus reason to inflate it.
Here are links to the last eight Saturday Oil Reports. Later.
Saturday Oil Report -- February 18, 2012
Saturday Oil Report -- February 4, 2012
Saturday Oil Report -- January, 21 2012
Saturday Oil Report -- January 7, 2012
Saturday Oil Report -- December 17, 2011
Saturday Oil Report -- December 3, 2011
Saturday Oil Report -- November 19, 2011
Saturday Oil Report -- November 5, 2011
Excellent post, Dave, top notch analysis.
Posted by: Wanooski | 02/27/2012 at 11:50 AM