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December 11, 2011

Oil Price Outlook: Top 8 Market Drivers

I was fortunate enough to take Energy Burrito on the road earlier this week to the AMM Conference in Miami. Given a 30-minute blank canvas, I decided to spread the Christmas spirit by unleashing the ultimate commodity Christmas gift, the Crude Oil 8-ball, on the unsuspecting audience.  

The premise of my presentation was to highlight eight pertinent factors which are shaking up the crude complex (of which the total statistics add up to 1385.7…hence the inspired (ahem) title of the presentation). So here’s a brief summary of the octuplet presented; they won't be that surprising to regular readers of the burrito, although they hopefully serve as a useful reminder:http://www.energyburrito.com/wp-includes/js/tinymce/plugins/wordpress/img/trans.gif

Libyan Production (840kbd) 

After oil production plummeted from a steady 1.5 mbd to as little as 10,000 barrels a day in August, oil production has rampantly ramped up again after the toppling of the Gadhafi regime. Just two weeks ago I wrote how supplies were back up to 700 kbd, while last week they were reported to be up to 840 kbd. This is helping to ease the supply tightness in Europe, which is one of the predominant recipients of Libyan oil.  

Euro Debt Crisis (1.3) 

Regardless of whether there is a happy ending to the tale that is the European debt crisis, it is already having a detrimental impact on the global economy. The ripple effect of slower economic growth in the Euro region is already encroaching the rest of the world, given global trade dynamics. The best case scenario is that austerity measures across countries such as Greece and Italy will help to reduce their debt to manageable levels, while only dragging the Eurozone into a minor slowdown and nothing worse. The downbeat outlook means the euro currency could likely weaken through 1.3 and beyond.

China oil demand (9 mbd) 

This is what I call 'The Bee Gees chart™', as it mimics the Bee Gee's disco dance, with the movement on the chart going from the bottom left to the top right (ask Summit CEO Steve Wilhite...he breaks this out for his speeches also). Chinese oil demand was at 3 mbd back in 1999, but is now at 9 mbd, showing growth of 0.5 mbd per annum. Although some estimates call for Chinese demand to match that of the US (= currently 18.5 mbd) by 2040, the current rate of demand growth predicts a shorter timeframe.

WTI / Brent spread ($27)

After spiraling as wide as $27, the spread between WTI and Brent crude prices has shrunk to less than $10 on the announcement of the sale of the Seaway pipeline from ConocoPhillips to Enbridge/ Enterprise Product Partners LP. This is because the new owners plan to reverse the flow of crude through the pipeline from the Gulf Coast to Cushing, to alleviate the supply glut that has built up at Cushing, OK, where WTI is priced.   

QE (…3) 

This is the 'bad is good' scenario for crude. If the economic situation in the US deteriorates in 2012 rather than continuing its gradually gradual improvement, we could see further government intervention. If this were to happen, we could see a repeat of what happened for QE2: a weakening US dollar + loose monetary policy + a move into riskier assets = Brent crude rally monkey: 

Geopolitical threat (2.6 mbd) 

Crude markets have seen their fair share of geopolitical turmoil in 2011, but it is only in recent weeks that Iran has moved to the forefront as the biggest geopolitical threat to prices. This is due to the combination increasing sanctions by the US and the EU considering sanctions on Iranian oil imports, after growing concerns about Iran's nuclear capabilities. The increased potential for supply disruption to the world's third largest oil exporter (2.6 mbd last year) has caused a steep rise in option activity at the $150 level for crude.   
US fuel demand (down 2.8% yoy) 

Again, a point referenced recently here on the burrito, distillate demand continues to show strength (although increasing exports are an attributing factor), while gasoline demand continues to crater. Strong distillate demand (+3.4% yoy) + weak gasoline demand (-3.5% yoy) =  muted total product demand in the US....down 2.8% on last year: 

Bakken oil shale (500kbd) 

Finally, I featured a chart relating to the Bakken shale (North Dakota oil production) a couple of weeks ago where production is approaching 500 kbd. Just as shale gas is bringing increasing volumes of unconventional supply to market, a similar scenario is underway for crude oil. However, shale oil will not have as large impact as natural gas, given oil's status as a global commodity, while natural gas is a domestic resource which cannot be exported (yet). That said, increasing oil shale production in the US will bring the benefit of less foreign reliance for oil, and potentially fewer price spikes.  

So there are 1385.7 observations on energy. From the potentially bearish influences of increasing Libyan production and the Euro debt crisis, to the building bullish influences of geopolitical tension and China oil demand, the crude market remains under a myriad of influences, with these eight being some of the most pertinent.

About The Author - Energy Burrito is founded by Matt Smith, Commodity Analyst at Summit Energy. (EconMatters author archive here.)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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