by Jody Chudley, Daily Reckoning
Dear Resource Hunter,
Recently oil plunged again, and this time WTI pricing even broke below $40 per barrel.
The main reason behind the crash this time? As everybody who watches the financial networks knows, China is falling apart, and so is its oil demand.
But there is just one thing…
The data actually shows that China’s oil demand is holding up just fine.
There has been no drop in China’s continued growth in oil demand in 2015. Focus on my wording there please. Not only is China’s demand for oil not falling, it is continuing to grow at a rate that is in line with recent years.
I believe this second bout of oil price decline has nothing to do with actual supply and demand fundamentals. Instead, this surprising move down is tied to the panic in global stock markets (particularly in China), which has resulted in traders doing what they do… capitalizing on fear and driving down the price of crude.
Ignore the Talking Heads — Focus on the Numbers
When the price of an asset class moves dramatically one way or the other, the financial networks need to bring out people to explain what is going on.
Unfortunately, the main qualification that these people need to have is the willingness to offer an opinion, preferably an exciting one on the subject at hand.
So when oil prices drop significantly, the talking head the financial networks want the most is the one who is going to spit out the most attention-grabbing quote to attract viewers. Someone willing to say oil is going to $35 is good, but someone willing to say oil is going to $10 per barrel is better.
In the late ’90s, the financial networks found their ratings spike when they sold us all on greed. Greed for those Internet stocks that just kept going up and up.
In 2008/2009, the financial networks had another ratings boost by feeding us fear. I remember clearly one network keeping the stock prices of the most troubled financial stocks (AIG, Citigroup, Bank of America) flashing on the screen all day long as they were in free fall, so that we could all watch in horror.
My point being if you are looking for forward-looking thinking, or any conclusions based on actual analysis, you likely aren’t going to find it on your television.
The best place to look is in the data, provided you can find some that you believe are reliable.
China’s oil demand hasn’t crashed. It may still do that, but there is nothing in the actual data so far in 2015 that shows anything to support oil prices doing what they have done since the end of June.
Take a look…
The graph above is from Platts data and shows China’s demand for oil from the start of 2010 through the end of June 2015. The blue bars show the oil demand for the first and second halves of each year, and the line tracks monthly demand.
The monthly demand clearly gradually increases over time, but it is bumpy. What is very clear from the data — in fact, it is the most obvious thing on the chart — is that China’s oil demand in the first half of 2015 reached a new all-time high.
Respected London-based energy consulting firm Energy Aspects confirmed the Platts data, reporting that China’s oil consumption came in at just over 10.5 million barrels a day in the first six months of 2015. The Energy Aspects numbers show that being a 4.8% increase from the prior year, or an additional 480,000 barrels of oil.
The percentage increase in China’s oil demand does decrease every year, as it is growing from a bigger base. What has been quite consistent is the growth in absolute terms (the number of barrels), and 2015 is no different.
Questionable Information Everywhere — The IEA Is in on It Too
It is fairly easy to dismiss the talking heads on the financial networks when they are all pretty much spouting the same message about oil prices.
Ignoring the work of an entire agency of people dedicated to studying a subject is more difficult.
The International Energy Agency (IEA) was formed by Western nations to keep an eye on things after the oil crisis of the early 1970s, when we were hung out to dry by OPEC’s oil embargo.
The IEA’s August 2015 Oil Market Report stated the second-quarter global oil market was oversupplied by a shocking 3 million barrels per day.
I’m sure the IEA folks are all very bright and quite well intentioned, but I’ve got a really important question for them. If the oversupply was this large, where did all of this oil go?
I’m no rocket scientist, but this doesn’t seem all that complicated.
If the global oil market was oversupplied by 3 million barrels per day in the second quarter of 2015, that should mean that global inventories grew by 273 million barrels during that time (91 days in April-June).
But they didn’t.
According to the August Monthly Oil Market Report from OPEC, total global oil stocks only increased from 4.397 billion barrels at the end of March to 4.446 billion barrels at the end of June. That is a 49 million barrel increase, not 273 million.
If I also add in the 46 million barrel increase in oil floating in tankers, from 864 million barrels to 910 million barrels, the total Q2 global inventory increase is 95 million barrels. But even then I’m 180 million barrels short of the IEA headline making declaration of a 3 million barrel per day global oil glut.
Based on just the numbers, it looks like the second-quarter oversupply was closer to 1 million barrels per day than it was to 3 million barrels per day.
The Saudis Keep Pumping
Demand has surged in the U.S. and globally in a much bigger way than was expected, and American tight oil production growth is gone and production is now in decline.
I also just listened to the Schlumberger second-quarter conference call, and the giant oil service company thinks production outside of North America and OPEC is in even worse shape.
The one complication in an oil recovery has been Saudi Arabia, which didn’t just not cut production in response to the oil crash, but decided to actually increase it. There may be some relief coming on that front in September, as indications are that Saudi production will be reduced by 200,000-300,000 barrels per day. An announcement like that could single-handedly crack the whip on oil’s impending recovery.
Sure, emotions and momentum can drive market prices in the short term. But over the longer term, the fundamentals will win out.
The fundamentals for the price of oil are getting better, and the current oil price doesn’t work for anyone drilling new oil wells today. North American producers need higher prices to achieve sufficient levels of profitability. Middle Eastern countries need higher oil prices to fund their national budgets.
The current price of oil is simply not sustainable, and market forces will eventually fix that.
Keep looking through the windshield,