Peak Oil Review: A Midweek Update – Apr 14

Oil prices set 2016 highs on Tuesday but then pulled back Wednesday on an unexpected increase in US crude stocks and growing skepticism that the meeting in Doha on Sunday will have any significant impact on oil supplies. At the close Wednesday, New York futures were at $41.76 and London at $44.18. The weekly stocks report showed US crude inventories up by 6.6 million barrels while only 1.8-million-barrel increase was expected. Gasoline stocks were down by 4.2 million barrels, but total commercial petroleum inventories increased by 6.9 million which is what really counts. Some analysts are growing suspicious that part of the large increase in US domestic gasoline consumption that EIA has been reporting in 2016 is in reality going to export. The EIA only accounts for how much gasoline is leaving US refineries and how much is imported.  It takes many months before actual, rather than estimated, exports can be entered into the calculation so that an accurate picture of what is happening can be developed.

 

The outlook for the Doha conference next Sunday blew hot and cold this week. It is obvious that every exporter would like to receive a higher price for its oil. If this can be achieved through hinting that some sort of an agreement on oil production is in the works, so much the better. This week we had the Russians talking about a secret meeting with the Saudis to discuss world prices which naturally sends oil prices higher from the implication that some undefined production agreement will be reached. For now, the betting seems to be that some sort of a benign agreement will be reached at Doha, and that it will be spun into something more significant than it really is, while doing nothing to cut production significantly. There is little doubt that the massive decline in capital expenditures on oil exploration that has taken place in the last two years and the ongoing production cuts by high-cost producers will eventually drive production lower and prices higher.

 

The heart of the argument, however, is just how soon will this occur. Pessimists worry that there will be another price dip soon as storage facilities become overloaded. Optimists talk of the worst being over, chart points being breached, and $50 or $60 oil being just over the horizon. An argument can be made for either side of these positions.

 

At the macro level, there was some news this week. The IMF cut its global economic growth outlook to 3.2 percent noting that China’s economic slowdown and weak commodity prices are hurting developing countries. The Fund also noted that the rich nations are still grappling with the fallout from the financial crisis and seeing little economic growth. OPEC now believes that production from non-OPEC producers such as the US will fall by some 730,000 b/d this year. Whether this is offset by increased Iraqi and Iranian exports remains to be seen.

 

China reported that its exports in March increased by 18 percent with imports fell by 7 percent. Beijing’s oil imports set a record in the first quarter, climbing by 13 percent year-on-year to 7.34 million b/d. Much of the increase is thought to be going to export, strategic storage, or to fuel the 20 million new cars that the Chinese are selling themselves each year.  Doubt about China’s real economic growth vs. the numbers the government keeps releasing continues.