Tuesday, November 25, 2014

The World Is Awash In Oil (excerpt)

Consumers should be thankful for the plunge in oil prices since the summer. The price of a barrel of Brent crude oil peaked this year at $115.15 on June 19. It is down 31% to $79.43 since then. The futures price of a gallon of gasoline is down 34% over this same period. This decline saves consumers about $150 billion at an annual rate at the pump--just in time for the holiday shopping season. There could be even more windfalls at the pump ahead for consumers.

Most of the oil price decline occurred after Saudi Aramco started a price war on October 1 for all its exports, reducing those bound for Asia to the lowest level since 2008. Bloomberg reported: “The move suggests that the biggest member of the Organization of Petroleum Exporting Countries is prepared to let prices fall rather than cede market share by paring output to clear a supply surplus ...

“Saudi Arabia has acted in the past to stop a plunge in prices. It made the biggest contribution to OPEC’s production cuts of almost 5 million barrels a day in 2008 and 2009 as demand contracted amid the financial crisis. The kingdom would need to reduce output about 500,000 barrels a day to eliminate the supply glut now stemming from the highest U.S. output in three decades ...”

Iran's semi-official news agency Mehr reported on Sunday that ministers from Iran will seek an output cut from Saudi Arabia at Thursday’s meeting of OPEC. Yesterday, Reuters reported, “Oil prices could plunge to $60 a barrel if OPEC does not agree on a significant output cut when it meets in Vienna this week, market players say.” OPEC probably needs to slash production by at least 1.0mbd to stabilize prices. That’s not likely to happen. Let’s review October’s Oil Market Intelligence (OMI) data on global crude oil supply and demand:

(1) Supply. World crude oil production soared to a record 93.0mbd during October. That’s up 3.3mbd in just the past five months! Over this period, non-OPEC output is up 2.0mbd, while OPEC output is up 1.3mbd. Furthermore, over this five-month period, the combined oil production of the US and Canada rose 0.9mbd to a record 12.7mbd, well exceeding that of both Saudi Arabia (9.6mbd) and Russia (10.6mbd).

(2) Demand. World crude oil demand rose to a record 92.8mbd during October. However, the growth rate slowed to 0.8% y/y, the slowest since May 2012. That slowdown is attributable to the advanced economies of the 34 members of the OECD. Their oil demand growth rate has been slightly negative for the past six months.

Today's Morning Briefing: Thanksgiving. (1) Counting our blessings. (2) The Ackerman bull market. (3) From 666 to 2063. (4) Da Vinci Code. (5) EMU hasn’t disintegrated so far. (6) Fully invested bears and the Endgame. (7) Muddling along beats the alternatives. (8) The importance of stock buybacks. (9) No double-dips or fiscal cliffs for the US. (10) Secular bull vs. melt-up. (11) OPEC’s holiday gift to consumers. (12) Global oil supply soars as demand growth weakens. (13) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

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