American Oil and Gas Reporter - July 2015 - 29

MARKETMATTERS
A New Reality Is
Developing For World
Crude Oil Markets
The past year has turned the crude oil world upside down. Long
accepted axioms on the production and transportation of crude
oil have been challenged and a new reality is developing. It is only
a year since Saudi Arabia's decision to flood the market and force
out U.S. producers caused prices to fall.
West Texas Intermediate peaked at $107.73 during the week
ending June 20, 2014. Prices tumbled over the next seven
months, bottoming at $43.58 late in January. They then rallied,
but the rally had not topped $62.58 as of June this year. A price
recovery after so deep a fall could be expected to have retraced
at least 38 percent to be technically satisfied. The more shallow
bounce actually experienced-well below the technically minimal
upside objective of $68.09-raises the question of how successful the OPEC strategy has been. OPEC has confirmed that its production has ramped up to 31 million barrels a day. This is about
1 MMbbl/d more than its official quota.
It is one thing to force prices lower; that objective clearly has
been met. The rally to follow, however, remains in question. OPEC
officials' declaration that "we cannot have this $100 (a barrel) anymore" suggests the recovery component has been conceded to the
market, where it belongs.
The decision to open the faucet and sink prices was not made
in a vacuum. The United States has developed diversified
sources of supply. Other supply sources are developing as well.
Renewed exports from Iran may be only months away. Expansion in Iraqi output, and perhaps Libya as well, could add to global supplies. Production from shale is not the only reason for lower prices.
It is not hard to reach the conclusion that OPEC's pricing power and geopolitical reach have peaked. What had been unimaginable is fast becoming the reality. Crude oil supply has broadened geographically. The United States and Russia are adding materially to world totals.
The International Energy Agency reports "exceptionally
high" output among non-OPEC producers. The agency anticipates
those producers will see 2015 growth of nearly 1 MMbbl/d.
U.S. production is a major contributor to that growth. In fact,
the United States was the largest oil and natural gas producer in
the world last year. British Petroleum's Statistical Review reports
that U.S. crude oil output rose 1.6 million MMbbl/d in 2014. EIA
reports crude oil output at 9.6 MMbbl/d in one of its most recent
weekly reports, approaching all time high production levels.
Demand has responded bullishly. IEA forecasts global demand
growth of 1.4 MMbbl/d, to an average of 94.0 MMbbl/d this year.
U.S. gasoline demand growth is expected to be 4.2 percent. Vehicle miles driven in the first quarter were up 3.8 percent.
There are other signs of the changing landscape. Perhaps recognizing changes in the situation, Saudi Arabia has started to diversify its industrial mix. The kingdom has become a major refiner, and has shares in more than 5 MMbbl/d of global refining
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" It is only a year since Saudi Arabia's

decision to flood the market and force out
U.S. producers caused prices to fall.

capacity. This offers an outlet for its crude oil, irrespective of market movement.
Other OPEC members have sought diversification as well.
Kuwait and the United Arab Emirates have refining assets and
reportedly are gaining trading skills. Each of them has about 1
MMbbl/d of refining.
Technology has developed even more challenges to OPEC's
position as the pre-eminent oil producer. Renewable energy sources
have gained share, too. The U.S. Energy Information Administration estimates about 11 percent of world marketed energy consumption is from renewable energy sources (biofuels, biomass,
geothermal, hydropower, solar and wind), and projects a 15 percent market share by 2040.
Petroleum markets remained in a tight trading range in midJune. Crude oil had traded between $56.50 and $62.58 since midApril. Trading in a range is at odds with the supply/demand situation reported by EIA. Weekly reports have been replete with
record and near-record domestic crude oil production and inventory
numbers that are bearish for price.
Changes in oil balances are not limited to crude oil. The same
reports show high gross inputs to refining, which is bullish for
crude oil, but bearish for products. Gasoline demand was very substantial as well.
Propane is a good example of the growth in availability. Inventories in mid-June were at 79 million barrels, 60 percent higher than last year at that time. Canadian supplies are not included in this figure, but it is clear that stocks are superabundant to
the north as well. A negative price has been recorded at Edmonton.
On May 19, prices were cited as negative, a record low. The Canadian National Energy Board reported seasonally record high western Canadian propane supplies of 4.36 million barrels going into
May.
r

ALAN H. LEVINE is chairman
and chief executive officer of
Powerhouse, a registered affiliate
of Coquest Inc., and a commodities
brokerage offering hedging services to the energy industries.
Levine has more than four
decades of experience as a petroleum specialist. He may be
reached at alan@powerhouseTL.com or 202-333-5380.

JULY 2015 29

American Oil and Gas Reporter - July 2015

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