The U.S. Over-Supply of Oil is Ending - Art Berman · Labyrinth Consulting Services, Inc. artberman.com Slide 2 The U.S. Over-Supply of Oil is Ending • Comparative inventory (C.I.)

Slide1LabyrinthConsultingServices,Inc. artberman.com

The U.S. Over-Supply of Oil is EndingPay-It-Forward Network

Art Berman Labyrinth Consulting Services, Inc.

November 17, 2017


TheU.S.Over-SupplyofOilisEnding

• Comparativeinventory(C.I.)hasbeendramaticallyreducedin2017.• Levelshavefallen165mmb sinceFebruaryandarenowapproachingthe5-yearaverageforthefirst

timeinnearly3years.• ThecausesoftheU.S.inventorydrawdownareclear:increasedexportsofcrudeoilandgreater

domesticconsumption.

239

213

159

48

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20

30

40

50

60

70

80

90

100

110

Jan-13

Feb-13

Mar-13

Apr-13

May-13

Jun-13

Jul-1

3 Au

g-13

Sep-13

Oct-13

Nov-13

Dec-13

Jan-14

Feb-14

Mar-14

Apr-14

May-14

Jun-14

Jul-1

4 Au

g-14

Sep-14

Oct-14

Nov-14

Dec-14

Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-1

5 Au

g-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Jul-1

6 Au

g-16

Sep-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

Jul-1

7 Au

g-17

Sep-17

Oct-17

Nov-17

Dec-17

ComparativeInventory(m

mb)

WTIPrice($/barrel),Stocks&

5-YearA

verageStocks(mmb)

TheU.S.Over-SupplyofOilisEnding

Source:EIA &LabyrinthConsulting Services,Inc.

WTIPrice(LHS)

PositiveC.I. (RHS)NegativeC.I. (RHS)

Stocks(LHS)

5-Year AvgStocks(LHS)

OilOver-Supply

OilUnder-Supply


• AninterpretedyieldcurvethatcorrelatesC.I.andWTIpriceisdevelopedbycrossplottingthesamedatawithoutthetimedimension.

• Theyieldcurvemayprovidepricesolutionstoinventoryreductionassumptionsinthenearterm.• IfC.I.continuestofallatthe9-monthaverageof4mmb/week,oilpricesmaybeapproximately$67

perbarrelbytheendofDecember.• IfC.I.fallsatthe8mmb/weekaveragesincelateSeptember,WTIcouldapproachlevelsnotseen

sincebeforethepricecollapseinlate2014.

ComparativeInventoryYieldCurvePredicts$67+WTIPricesByJanuary2018

$0

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$55

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$115

-50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250

TheU.S.Over-SupplyofOilIsEndingComparativeInventoryHasFallen165mmbin2017

Comparative Inventory (C.I.)Millionsof Barrels

WTIPrice($/barrel)

Source:EIA&La

byrinthConsultingServices,Inc.

$40

$55

Mar-June 2015False

Optimism

2014-2017Data

Mid-cycleprice(5-yearaverage)

Late 2015-Early2016Pessimisim

(Cushing >80%Capacity)

Early 2017OPECProduction-Cut

Optimism

Nov32017

Mid-Feb2017

165mmb

YieldCurve

48mmb

Price responsewillbemorepronounced

going forwardbecauseofincreasingcurvature

oftheYieldCurve

12

3

4

Nov.2014OPEC

decisionnottocut

production

Nov102017


CrudeOilExportsandtheBrent-WTISpread

• Crudeoilexportsforthefirsthalfof2017averaged0.8mmb/dbutroseto1.8mmb/dinSeptemberandOctober.

• Increasedexportsnowaverage7-12mmb/weekandcontributesubstantiallytoreducedinventorylevels.

• HigherexportlevelscorrelatewiththeincreasedspreadbetweenBrentandWTIpricesthatbeganinlateJuly.

• TraderscansellU.S.crudeoiloverseasatlessthaninternationalpricesbutatlevelshigherthandomesticpricingallows.Recordexportsof2.13mmb/doccurredduringtheweekendingOctober27.

• Exportshaveaveraged~1mmb/din2017—almostdoublelevelsin2016.

1.1

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9

0

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2.5

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Jul-16

Aug-16

Sep-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

Jul-17

Aug-17

Sep-17

Oct-17

Nov-17

NetCrudeO

ilIm

ports(m

mb/d)

CrudeO

ilExports(m

mb/d)

CrudeOilExportsBackAbove1mmb/dforWeekEndingNovember10

CrudeOilExports&4-WeekAverage(LHS)

NetCrudeImports&4-WeekAverage(RHS)


AnnualAvg

AnnualAvg

908kbpd

485kbpd

7.44mmbpd7.10mmbpd

Exports 423kb/dmorethanin2016&accountfor>6mmb/week2.1mmb/dOct 27

CrudeOilExportsHaveAveraged0.9mmb/din2017

1.49

1.98

1.801.92

2.13

0.87

1.13

$7.24

-$2

-$1

$0

$1

$2

$3

$4

$5

$6

$7

$8

0

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1

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3.5

4

1/1/16

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12/1/

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4/1/17

5/1/17

6/1/17

7/1/17

8/1/17

9/1/17

10/1/

17

11/1/

17

Brent-WTIPriceSpread($/barrel)

CrudeOilExports(m

mb/d)

CrudeExportsIncreased+0.3mm/d(+1.8mmb/week)FromPreviousWeekBut~1mmb/dLessThanSeptember-OctoberLevels


Weekly CrudeOilExports&4-Week Average(LHS)

Brent-WTIPriceSpread&4-WeekAverage

(RHS)

Brent-WTIspreadreached$7.24lastweek


CrudeOilExportsandtheBrent-WTISpread

• Tightoilproductionlevels,crudeoilqualityandU.S.refineryblendingneedsarebehindtheWTIdiscounttoBrentprice.

• MostU.S.refineriesaredesignedforinternationalgradesofoillikeBrentwhichisheavierandcontainsmoresulfurthanWTI.

• TheU.S.hashadasurplusoflightsweetoilsincethetightoilboombegan,andtheBrent-WTIspreadreachedalmost$30/barrelinSeptember2011asaresult.

• MiddleEastfearpremiumhasbeenanimportantfactorsinceJune2017.

-0.02

$7.24

0

5

10

15

20

25

30

-$2.00

-$1.00

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

5/6/16

5/2

0/16

6/3/16

6/1

7/16

7/1/16

7/1

5/16

7/29/1

6 8/1

2/16

8/26/1

6 9/9

/16

9/23/1

6 10

/7/16

10

/21/16

11

/4/16

11

/18/16

12

/2/16

12

/16/16

12

/30/16

1/1

3/17

1/27/1

7 2/1

0/17

2/24/1

7 3/1

0/17

3/24/1

7 4/7

/17

4/21/1

7 5/5

/17

5/19/1

7 6/2

/17

6/16/1

7 6/3

0/17

7/14/1

7 7/2

8/17

8/11/1

7 8/2

5/17

9/8/17

9/2

2/17

10/6/

17

10/20

/17

11/3/

17

Cusih

ingCrudeOilComparativeInventory(m

mb)

BrentPrem

iumto

WTICrudeOilPrice

($/barrel)

BrentPremiumtoWTIAt$7.24/barrelCausedByMiddleEastFearPremium&WTITransportConstraints(NowEasingSomewhat)

Qatar restoreddiplomatic

relationswithIranAug24

Qatar ransomtoIraqiShi'itemilitants

June5

KurdishReferendumSept25

Source:EIA&LabyrinthConsultingServices,Inc.

BrentPremiumtoWTI(LHS)

Cushing ComparativeInventory(RHS)

Saudi PurgeOct24


StructuralProblemsGettingWTItoEastCoastRefineries

• Thespreaddecreasedtoabout$2.25withtheadventofrailshipmentsofWTItoEastCoastrefineries,andassociatedreducedlightoilimports.

• Thetransportcostwasreasonablewhenoilpriceswere$100perbarrelbutloweroilpricesafter2014resultedinaprogressivedeclineinrailshipments.

• EastCoastrefinersincreasinglyreliedagainonimportedlightoilmostlyfromWestAfricatoblendwithheaviergradesofoil.

• Asurplusoftightoilreturnedasproductionrecoveredasaresulthigheroilpricesin2016and2017.SurplussupplycauseddiscountedWTIprices,andtherecentincreaseintheBrent-WTIspread.

• Someofexcessoilhasbeenexportedinrecentweeksbutthepricespreadpersistsbecauseimportlevelsaresofarunaffected.


IncreasedDomesticConsumptionis2nd CauseofInventoryDrawdowns

• Consumptionreacheda10-yearrecordof21mmb/dduringthesummerof2017.• August2017consumptionwas300kb/dmorethaninAugust2016andthatdifferenceaccountsfor

morethan2mmb/weekofincrementalinventoryreduction.• Infact,theincreaseinconsumptionthatbeganinJanuarycoincidedwiththebeginningof

comparativeinventoryreductionthatinFebruary.

21.3

19.8

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0

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100

150

200

250

300

18.0

18.5

19.0

19.5

20.0

20.5

21.0

21.5

22.0

22.5

1/3/14

3/3/14

5/3/14

7/3/14

9/3/14

11/3/

14

1/3/15

3/3/15

5/3/15

7/3/15

9/3/15

11/3/

15

1/3/16

3/3/16

5/3/16

7/3/16

9/3/16

11/3/

16

1/3/17

3/3/17

5/3/17

7/3/17

9/3/17

11/3/

17

CrudeOil+

ProductsComparativeInventory(m

mb)

Csonum

ption(ProductSuppliedmmb/d)

U.S.RefinedProductConsumptionFell-1.6mmb/dThisWeek

Consumption(LHS)

Comparative Inventory(RHS)


4-WeekAvg

AnnualAvg20.1mmb/d

21mmb/d

from21.3to19.8mmb/d(-11mmb/week): TheMain Factor inComparative Inventory Increase

BeginningofConsumptionIncrease

BeginningofInventoryReduction


GreatestPortionofConsumptionisFromTransportation

• U.S.traveldataseemstocontradictconsumptiondata.• VMTgrowthhasslowedsincemid-2017.• DecliningVehicleMilesTraveled(VMT)mid-2005throughmid-2014.• Highgasolinepricesand2007-2008FinancialCollapsemostprobablecauses.• StrongVMTrecoverywithlowergasolinepriceswithoil-pricecollapse.• RecentdeclineinVMTprobablybecauseofhighergasolineprices.• Or,areconsumptionandtraveldataexplainedbylatesummerhurricanes?

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

9.2

9.3

9.4

9.5

9.6

9.7

9.8

9.9

10

10.1

10.2

Jan-00

Jun-00

Nov-00

Apr-01

Sep-01

Feb-02

Jul-0

2 Dec-02

May-03

Oct-03

Mar-04

Aug-04

Jan-05

Jun-05

Nov-05

Apr-06

Sep-06

Feb-07

Jul-0

7 Dec-07

May-08

Oct-08

Mar-09

Aug-09

Jan-10

Jun-10

Nov-10

Apr-11

Sep-11

Feb-12

Jul-1

2 Dec-12

May-13

Oct-13

Mar-14

Aug-14

Jan-15

Jun-15

Nov-15

Apr-16

Sep-16

Feb-17

Jul-1

7

GasolinePrice

(Septem

ber2

016$/gallon)

ThousandsofVehicleMiles(VMT)PerPerson

VehicleMilesTraveled(VMT)GrowthisSlowingWithHigherGasolinePrices

Source:U.S. DOT,U.S.DeptofLaborStatistics,EIA&LabyrinthConsultingServices,Inc

VMTGrowth(LHS)

GasolinePrice(RHS)

RapidVMTGrowthWithLower

GasolinePrices

SlowingGrowth

$1.90

$2.00

$2.10

$2.20

$2.30

$2.40

$2.50

$2.60

$2.70

$2.80

$2.90

9.6

9.65

9.7

9.75

9.8

9.85

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Jul-1

6

Aug-16

Sep-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

Jul-1

7

Aug-17

Sep-17

GasolinePrice

(Septem

ber2

016$/gallon)

ThousandsofVehicleMiles(VMT)PerPerson

VehicleMilesTraveled(VMT)GrowthisSlowingWithHigherGasolinePrices

Source:U.S. DOT,U.S.DeptofLaborStatistics,EIA&LabyrinthConsultingServices,Inc

VMTGrowth(LHS)

GasolinePrice(RHS)

SlowingGrowth


ThePossibleDownsideofConsumption

• ContinuedhighU.S.consumptionistheonlyareaofconcernforsustainedhigheroilprices.• SeptemberandOctoberconsumptionwereconsiderablylowerthaninAugust.• Itisnormalforconsumptiontodeclineafterthesummerdrivingseasonbutthemagnitudeofthe

declineisdisturbing.• Octoberconsumptionwas1.5mmb/d(45mmb/month)lessthaninAugust.• ThatismorethanthetotalAugust-to-Januaryseasonaldeclineduringthepreviousyear(1.4mmb/d,

42mmb/month).• SofarinNovember,consumptionhasrebounded.

20.5

-1.5

-1

-0.5

0

0.5

1

1.5

2

2.5

19.0

19.5

20.0

20.5

21.0

21.5

Jan-16

Feb-16

Mar-16

Apr-16

May-16

Jun-16

Jul-1

6

Aug-16

Sep-16

Oct-16

Nov-16

Dec-16

Jan-17

Feb-17

Mar-17

Apr-17

May-17

Jun-17

Jul-1

7

Aug-17

Sep-17

Oct-17

Nov-17

Year-Over-Y

earProductSupplied(m

mb/d4-WeekAv

erage)

ProductSuppliedMonthlyAverage(m

mb/d)

OctoberU.S.ConsumptionWas1.5mmb/d(-45mmb)LessThanThanInAugustButHasReboundedinNovember

Source:EIA&LabyrinthConsultingServices,Inc.

Monthly Average(LHS)

YOY4-WkAverage(RHS)

October2017

Oct.2016

August2017

August2016

January2017

-1.4mmb

-1.5mmb

Nov. 2017


ConsumptionWillDecreaseIfGasolinePricesIncreaseWithHigherOilPrices

• ConsumptionbecomesagreaterconcernifoilpricesincreaseasmuchasIexpectbecausegasolinepriceswillincreaseaccordingly–consumptionandgasolinepricearenegativelyrelated.

• Higheroilpricemeanshighergasolinepriceandlowerconsumption.• $70WTIwillresultinalmosta$1/gallonpriceincreaseabovethecurrentaverageretailpriceof

$2.53andthatmaydepressconsumption.


CriticalBalanceBetweenSupply&ConsumptionofCrude+RefinedProducts

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1/6/17

1/20/1

7

2/3/17

2/17/1

7

3/3/17

3/17/1

7

3/31/1

7

4/14/1

7

4/28/1

7

5/12/1

7

5/26/1

7

6/9/17

6/23/1

7

7/7/17

7/21/1

7

8/4/17

8/18/1

7

9/1/17

9/15/1

7

9/29/1

7

10/13

/17

10/27

/17

11/10

/17

11/24

/17

FieldProduction+NetCrude+ProductIm

ports(m

mb/d)

ProductSupplied(m

mb/d)

LastWeekDomesticConsumptionDecreased1.5mmb/d(11mmb/week)


Supply(RHS)

Consumption(LHS)

4-week avg.

4-week avg.

FieldProduction,NetCrude+ProductImportsIncreased0.17mmb/d(1.2mmb/week)

Critical BalanceBetweenSupply&Consumption ofCrudeOil +RefinedProducts


Supply(RHS)

Consumption(LHS)

4-week avg.

4-week avg.

• Althoughthelargedecreaseindomesticconsumptionappearstoberebounding,thismustbecarefullywatchedsinceithasbeenthemaindriverofinventoryreduction.

• Netcrude+productimportsarealsoimportantasrefineryintakesincreasefollowinghurricanedisruption.

• TheBrent-WTIspreadwilllargelydeterminecrudeexportlevelsthathavegivenamajorboosttoinventoryreductionsincethespreadwidenedinlateJune.

• TheupcomingOPECmeetingonextendingproductioncutswillbeacriticaldriverofmomentumforincomingweeks.


Iamcautiouslybullishonoilpricesdespitetherecentpricepullback

• NYMEXpricesexceeded$55for1st timesinceJuly2015,fellbackto$55&arenowvacillating.• TradersrecentlyunwoundsomelongpositionsthenreversedlastFridayandreversedagainMonday,and

reversedagaintoday.Sidewaysmovementbasedonsentiment-basednon-substantive“news.”• IamcautiouslybullishonpricesbecausetheBrent-WTIspreadhasincreasedandfavorshigherU.S.exports.• Domesticconsumptionisthekeydriverforinventoryreductionanddespiteuncertainty,looksstrong…fornow.• OPEC’scutshavetakensubstantialoiloffthemarket&SaudiArabiawillkeepsomelevelofcutsinforce

regardlessofdisunityinOPEC.• ExpectationforU.S.productiongrowthisexaggerated.• Forthenearterm,IanticipatepricesrisingperhapsmoreslowlythanIdidafewweeksago.• Peakdemandisafadconcernforthemediumterm.• Biggestconcerniswhetherhigheroilpriceswilldampeneconomicgrowth.

-$1.2

-$1.0

-$0.8

-$0.6

-$0.4

-$0.2

$0.0

$0.2

$0.4

$40

$42

$44

$46

$48

$50

$52

$54

$56

$58

$60

10/2/

17

10/4/

17

10/6/

17

10/8/

17

10/10

/17

10/12

/17

10/14

/17

10/16

/17

10/18

/17

10/20

/17

10/22

/17

10/24

/17

10/26

/17

10/28

/17

10/30

/17

11/1/

17

11/3/

17

11/5/

17

11/7/

17

11/9/

17

11/11

/17

11/13

/17

11/15

/17

11/17

/17

11/19

/17

Font-to

-Back(CL1-CL7)M

onthContractSpread($

/barrel)

Front-M

onthCL1FuturesContractPrice

($/barrel)

TradersVacillateonWTIBetsNov.6- Nov.20

ContangoRHS(Futures >SpotPrice)

BackwardationRHS(Spot >FuturesPrice)

WTICL1Price(LHS)Nov6

Source:Bloomberg, Quandl, EIA&LabyrinthConsulting Services,Inc.

CL1- CL7

CL1- CL7

Nov17

Front-to-Back CL1-CL7 FuturesSpreadsAreinSlightContago

Nov20

0

10

20

30

40

50

60

$40

$41

$42

$43

$44

$45

$46

$47

$48

$49

$50

$51

$52

$53

$54

$55

$56

$57

$58

$59

$60

11/1/

16

11/15

/16

11/29

/16

12/13

/16

12/27

/16

1/10/1

7

1/24/1

7

2/7/17

2/21/1

7

3/7/17

3/21/1

7

4/4/17

4/18/1

7

5/2/17

5/16/1

7

5/30/1

7

6/13/1

7

6/27/1

7

7/11/1

7

7/25/1

7

8/8/17

8/22/1

7

9/5/17

9/19/1

7

10/3/

17

10/17

/17

10/31

/17

11/14

/17

OilP

riceVo

liatilityIndex

NYMEXW

TIFuturesPrice($/barrel)

$55NYMEXUpperRangeBoundaryExceeded1stTimeSinceJuly2015

Source:EIA,Bloomberg &Labyrinth Consulting Services,Inc.

$45PerBarrel

$55PerBarrel

OPECCuts

$49.83AvgPrice

Testing$58ResistanceButLosingGround Lately

NYMEXPrice(LHS)

Oil-PriceVolatility(RHS)

Documents

The U.S. Over-Supply of Oil is Ending - Art Berman · Labyrinth Consulting Services, Inc. artberman.com Slide 2 The U.S. Over-Supply of Oil is Ending • Comparative inventory (C.I.)