2009 Oil Estimates

On Friday we wrote a morning commentary about the expiring WTI January contract (for oil) and the huge price discrepancy between it and the January Brent contract and the February WTI contract. The reason for this discrepancy, we assume, is that someone got caught long oil and was unable to take physical delivery of it due to lack of storage.

So the January contract traded under $33/bbl while the February contract stayed above $42. Quite an arbitrage spread if you had the storage capacity and it certainly doesn’t speak to the health of the current oil market. Yet we remain bullish.

There are a couple of facts about oil. In 2008 demand was about 85 million barrels per day and supply was around 85 million barrels per day. Obviously when oil prices were extremely high, we saw all kinds of new supply coming on. I read a story about some dentists and doctors in Saskatchewan that set up their own oil rig in the summer. Even still, the supply of oil from 2004 ($37.66/bbl average price) to 2008 ($97.98/bbl average price) only increased from an estimated 83.1 million barrels per day to a peak of 85.69 million barrels per day (those are EIA estimates).

During the same time period, demand increased from 82.41 million barrels per day to a peak of 86.94 million barrels per day (currently they estimate we are at 85.27 million barrels per day). OPEC made up about 30-32 million barrels per day of supply during that time period. They have some of the cheapest production in the world, but are planning to cut to 25 million barrels per day. Assuming they can only get to 27.5mm (due to cartel cheating) then world supply goes from 85.69 barrels per day (Q3 estimate) to something in the neighborhood of 81.19mm bbls/day to 83.19mm bbls/day.

That of course assumes that all the increased supply of the past 4 years does not disappear due to lower prices.

World estimates for 2009 oil demand usage are falling, but most estimates are still in the 85mm bbls/day range. That means, once OPEC cuts are in place (even though we know they are going to cheat), there will be a daily shortfall of approximately 2 to 3mm bbls/day in supply. I have seen estimates put the amount of crude at sea (as floating storage) at between 50mm and 100mm barrels. Meaning, within 50 days of the supply cut (and once again, bear in mind that these numbers completely overlook any shuttered non-OPEC production) all of the floating storage will be used up.

I honestly don’t know how the market will react to that news, since, as I’ve said before, I don’t have a degree in psychology, but I would have to imagine that what is currently holding the crude market down is the excess inventory. If that is removed I have to imagine the crude price goes higher, albeit not back to $100/bbl as there would be plenty of shuttered production to come back online to demand.

Comments

[Ferdinand E...:]

I like this article. It contains a very important observation. Moreover, I like the author's approach, and although I would like to add a few things, I prefer to wait. Instead I have made the traumatic decision to read my international finance textbook. Better that than trying to figure out what OPEC will do as compared to what they should do.

Ferdinand E. Banks

2008 Dec 23 08:50 AM

[whisperonth...:]

Two possible outcomes come to mind. Either I will be justified in holding (and adding to) my oil stocks, as I hope, or we are all going down together. I don't want much, but $60-$70 oil would be nice.

2008 Dec 23 11:57 AM

[Black Rain:]

Ok, I have some serious problems with the numbers you stated above. . . .

1) Your highest peak supply number mentioned is 85.69 (and demand was at 86.94)
2) Your current demand number says we are at 85.27, presumably with the same supply (85.69).

So, how the heck did we end up with 50mm - 100mm barrels of excess "stored" supply in the past 3 months?

2008 Dec 23 12:37 PM

[Nick Abe:]

The data is not mine, it is the EIAs.
www.eia.doe.gov/emeu/i...

More than likely they average out the periods, and when oil was $147 a lot of extra supply was found that may not show up in these numbers. Also these are DAILY numbers. So using D=85.27 and S=85.64, then you are adding 370,000 barrels per day to supply. That was in Q2. We're now almost done Q4. So adding 1/3 of a million barrels per day for just under 300 days = just under 100mm barrels. That's assuming demand didn't drop from Q2.

2008 Dec 23 01:21 PM

[Simple guy:]

27.5 millimeters, 81.19 millimeters, 83.19 millimeters, 85 millimeters, 2 to 3 millimeters, 50 millimeters, 100 millimeters? What the heck are you guys going on about? I'd be more concerned about how many millions of barrels are involved, not how many millimeters are involved.

2008 Dec 23 03:26 PM

[Ron2008:]

The supply and demand numbers are wrong as usual. Japanese oil imports are down 17%. Korea 12%. Demand isn't at 85.27 for this year. And demand won't be 85 for next year.

2008 Dec 23 03:39 PM

[Polar747:]

This goes right back to the root of the problem that got us $150 oil. SPECULATION. They all throw these little snipits of half truths out there with a "sky is falling" spin. They should be arrested for manipulation of the oil markets.

Go back to basics and let the markets set the price, not speculation.

2008 Dec 23 09:12 PM

[jepittman:]

EVERYTHING??? You mean to say we could actually have an ECONOMIC RECOVERY soon?? You mean even the STOCK MARKET could go UP?? My heavens!! A BULL!! Marc Faber and Jim Rogers are BULLISH on US equities even though they would not be caught dead owning one. Folks you can't have inflating commodities in this environment without an economic and stock market recovery. If Faber and Rogers say inflation, then they also have to admit a global economic recovery is a given. With that comes a new bull market in stocks.


On Dec 23 06:47 AM Simmons wrote:

> MArc Faber is predicting big inflation ahead. Marc and Jim Rogers
> both agree on this topic. We will se higher prices ahead not only
> for OIL but for everything.
>
> www.jimrogers-investme.../

2008 Dec 23 10:04 PM

[wise:]

I agree than supply is tightening and with proven cuts there will be little margin of error-if demand does not decline in 2009, $75 oil is soon. which brings on decent oil sands in my home. If demand falls, then $60 oil which makes most money, and maybe a further OPEC cut. But $100 oil and eventually 200 is on the way in any case, 3-5 years.

2008 Dec 23 11:50 PM

[ninjaphysics:]

Ron2008,

Can you site your source for that? 2008 has come in mostly inline with 2007. See tonto.eia.doe.gov/cfap...

for instance.

I cant reproduce your claim of -17% for Japan either. Is that YOY? for which month? Latest data for Japan I have www.eia.doe.gov/emeu/i... has august down ~9-10% YOY.


On Dec 23 03:39 PM Ron2008 wrote:

> The supply and demand numbers are wrong as usual. Japanese oil imports
> are down 17%. Korea 12%. Demand isn't at 85.27 for this year. And
> demand won't be 85 for next year.

2008 Dec 29 02:31 AM