Volatile oil & gas market leaves financial analysts in the dark

28 February 2017 Consultancy.uk 7 min. read
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“Fake-news” hits oil markets, volatility due to data crunching agencies? EIA report contrasts API, OPEC on backburner?

After 24 hours of high optimism, based on a surprising report by the American Petroleum Institute (API), which reported last week Wednesday a crude oil stock draw of 840,000 bpd, the US Department of Energy’s EIA hit the market on Thursday with a report of a 600,000 bpd crude inventory build. The market reacted subdued, maybe shocked by the opposite analysis of the two well-known institutes. The majority of financial analysts, currently still working to regain their overall standing in the market due to the financial crisis and a lack of objective analysis of the real oil operations on the ground, is still following the line of the EIA.

The overall impact of both reports on global crude oil markets is still very low. The last weeks, crude oil has been hovering around $55 per barrel, with very low volatility showing since the end of 2016. Bulls and Bears are still fighting to gain the upper-hand, but the verdict still is out. The latter is however strange, looking at the overall developments on the global market, and especially in the main producing regions.

The last months one thing has become clear. Official data crunchers such as the EIA, API, IEA, OPEC and IEF, are not anymore the real deal. Their ongoing discussions on where the market is heading, immense diversity in figures and data, have put some analysts already off to even regard them as being a benchmark source of information. As long as their predictions, and reports, are largely contrary to what the real operations on the ground are showing, financial analysts and investors, operators and even consumers are left in the dark.


Predicting the future

Financial sector gurus and media analysts are looking for signs to be able to predict the future of the market. At present, they are left in the dark, and act like sheep following mainly the black sheep of former decades. Most of them are still crunching the reports and figures provided by the sorts like IEA, EIA or API, pretending that these reports are the Bible. Their exegeses is however based on outdated data or analysis, which is not looking into the real production and operations in mainstream oil producing regions, such as Middle East, Brazil, Russia or Canada. The predictions and reports of the international agencies are still used to base multibillion investments decisions on, showing a tendency for long-short or hold.

Until market analysts and investors understand that most facts in oil and gas, especially with regards to official production figures and prognoses, are based on assumptions, showing most of the times reconfigured figures and statistics, the market is diffuse, leaving a lot of room for misinterpretation.

A much more structural analysis however at present will take into account the vast changes ongoing in the major oil producing countries, mainly owned and operated by National Oil Companies (NOCs), such as Aramco, Gazprom, ADNOC, NOC or NNPC. Official figures and statistics of data crunchers such as EIA or IEA need to be assessed with new data providers, not linked to any government organisation or investment company. One of the upcoming gems at present is TankerTrackers.com, but there are other new kids on the block. Assessing all sides will sometimes, as it is at present, show you a different picture of reality. Unofficial sites are currently indicating a much more tight market than shown by EIA, IEA or even OPEC.

Before the end of 2017, based on these new figures and real production facts on the ground, a tight market could even change to a situation of higher demand than supply before the end of 2017. It is underestimated by most that OPEC countries are currently showing an compliance of around 90%, which is historically very high. Non-OPEC, which is not even bound to international agreements, such as Russia, is already showing compliance rates way above expectations. Last figures show a compliance of around 60%. When taking this into consideration, the end 2016 production freeze or cut agreement has already taken out 1.4-1.5 million bpd.

Shale-oil and the production paradox

Still, the market is largely looking at the very positive figures shown by US shale-oil. At the same time, optimism is still there, at least by the oil pundits, about the production increase of Iran, Iraq and even Libya. The influence of US shale oil should, looking at historical development, not be overestimated. The market however again expects that US shale will flood the market. At current price levels this will not happen, as most investors are not really happy to enter the market in full again after the bloodshed of the last years. Estimates show a very slow increase of production to 9.5 million bpd in 2018 for crude oil US, in comparison to 8.9 million bpd 2016 and 9 million bpd in 2017. This is only 600,000 bpd increase, less than 50% of current OPEC-non OPEC reductions in place.

Cyril Widdershoven Verocy

Even that the media constantly reports about increased rig usage in US shale, analysts should keep a wary eye on it as this is largely caused by very low rig rental prices and a large amount of rigs available. Oil consultancy Rystad already warns that these low cost scenarios could soon become a thing of the past. Most rigs will be available the next months against structurally higher prices. First price increases already are being reported, 10-15% price increases are already in place. Several others are warning that soon the break-even price for shale oil will be around $10 per barrel higher than at present. For OPEC and Russia these are very good signs, as it will increase overall position of their own production.

At the same time, the media is still in love with Iran, Iraq and Libya. The so-called Iranian oil glut is still not a fact. Figures presented by Iran will be only realistic if large scale investments are available, in combination with high-tech support from IOCs. The latter however are constrained to take part, as the Trump Administration is on a collision course with Iran. The US also has put in place new sanctions, while existing sanctions on Iran have been extended indefinitely.

The oil market currently is looking at a fictional bottom under the oil price of around $50 per barrel. Since weeks, crude prices are hovering around $55 per barrel, with a very low volatility on both sides. Price increases can only be expected if there is a structural change in production and demand volumes. Still, if no production increase (1.5-2 million bpd) is shown the coming months, the market will become very tight. Demand worldwide is still growing, China and India leading the pack.

The future of OPEC and non-OPEC is going to be decided the coming months. Looking at current developments, the end of OPEC is still not foreseeable. Instead of bloodshed scenarios for OPEC, reality shows a very positive development for NOCs and their national governments. Based on current situation, crude oil prices of $60-$65 per barrel at the end of 2017 (or earlier) are not anymore a dream but reality.

Related: McKinsey & Company downgrades its global energy demand outlook.

An article by Cyril Widdershoven, Director at Verocy, a management consultancy specialised in energy, geopolitics and the Middle East.