Global Oil Demand To Skyrocket

| About: The United (USO)
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Summary

Oil prices have been quite volatile lately, due in part, it seems to fears regarding global supply trends.

The EIA now expects that supplies will continue to climb through 2018 and US production will rebound sooner than expected.

Thankfully, this data does not take into consideration, it seems, substantial (temporary) cuts in output from OPEC and certain non-OPEC nations.

Another positive is the fact that oil demand looks set to skyrocket this year compared to last year, followed up with a further increase in 2018.

The past couple of days have not been terribly kind for oil, nor for the investors in this space, until January 12th when we saw a nice rebound. After seeing prices take a tumble on January 9th, January 10th resulted in another decline in excess of 2% as fears continue to surface that US oil production will increase and as concerns regarding OPEC's willingness to cut continue to fester. In what follows, I will provide one set of data that helps to explain these fears and give my own thoughts on what all of this means for investors in companies like Whiting Petroleum (NYSE:WLL), Chesapeake Energy Corp. (NYSE:CHK), Approach Resources (NASDAQ:AREX), and Legacy Reserves (NASDAQ:LGCY), as well as for the United States Oil ETF (NYSEARCA:USO) and other oil-related ETFs moving forward.

Some bad news

According to the Short-Term Energy Outlook released by the EIA (Energy Information Administration) on January 10th, the global inventory picture for oil should continue to worsen near-term. You see, despite positive developments on the economic and supply fronts, the picture this year should be worse than it was last year if their data turns out to be accurate. Take, for instance, the global commercial inventory picture shown in the image below. In it, you can see that, if the EIA's estimates are correct, global inventories last year were actually 3.101 billion barrels, about 44 million barrels greater than they predicted a month ago. This year, they expect inventories to end at 3.127 billion barrels, a number that should increase to 3.158 billion barrels in 2018.

*Source: Created by author with data from the EIA's Short-Term Energy Outlook

In addition to seeing total global inventories rise, the EIA also believes now that inventories in the US will be worse than expected. In the table below, you can see that inventories of crude plus petroleum products for 2016 came out to 1.32 billion barrels, 9 million barrels more than expected, and while stocks should fall to 1.281 billion barrels this year, only to tick up a further 5 million barrels in 2018, the 2017 estimate is 26 million barrels more than their prior forecast for the year.

*Source: Created by author with data from the EIA's Short-Term Energy Outlook

Some good news

At first glance, this inventory data is a negative for long-oriented oil investors and, should the EIA's estimates turn out to be accurate, the price of oil certainly deserves to be lower rather than higher. All of this said, however, I have a hard time believing that this will hold true. Take, for instance, the fact that the EIA currently expects US oil production to be higher than they thought a month ago. In the table below, you can see current forecasts call for production to climb by 0.11 million barrels per day this year, coming in 0.22 million barrels per day above December's forecast, followed by a further increase of 0.30 million barrels per day in 2018.

*Source: Created by author with data from the EIA's Short-Term Energy Outlook

Truthfully, I do not know what the future holds for US oil output but given the rise in the rig count in recent months, it is possible that production could climb. That said, the US is just one piece of the global oil supply so, in the table below, I provided data for the global picture for 2016, 2017, and 2018. This year, oil output should be about 1.09 million barrels per day above where it was last year (and last year's figure was revised higher by 0.30 million barrels per day), followed by an increase of 1.33 million barrels per day in 2018.

*Source: Created by author with data from the EIA's Short-Term Energy Outlook

This data has been calculated by the EIA assuming that no meaningful, long-term or short-term cut from OPEC and non-OPEC nations materialize. This is shown in the table below, which shows OPEC oil production coming out to 33.22 million barrels per day this year, up from 32.89 million barrels per day in 2016, followed by an increase to 33.73 million barrels per day in 2018. While it is possible that this could come to fruition, this ignores the fact that OPEC is aiming for production for the first half of this year totaling 32.50 million barrels per day. Of course, given the fact that OPEC members like Libya, Nigeria, and Iran can raise their output within reason, it's likely that output will be higher than this but when you factor in that certain non-OPEC producers are supposed to cut by 0.558 million barrels per day this year (while the EIA is projecting a build from Russia alone of 0.12 million barrels per day), it's probable that the supply picture will not look as bad as the EIA expects.

*Source: Created by author with data from the EIA's Short-Term Energy Outlook

Another bullish indicator, one that I and the EIA happen to agree on, relates to global oil demand. In the table below, you can see that the organization now thinks that global demand this year should come out to 97.20 million barrels per day, 0.21 million barrels per day above last month's forecast, and that demand last year was 0.14 million barrels per day. Overall, demand growth should now come out to an impressive 1.63 million barrels per day this year, followed by an increase of 1.51 million barrels per day in 2018. This is in alignment with a previous claim I made that global oil demand growth is likely to be higher than many expect this year unless China's economy happens to tank.

*Source: Created by author with data from the EIA's Short-Term Energy Outlook

Due to the changes forecasted by the EIA (and assuming that they are right and I am wrong regarding OPEC and certain non-OPEC oil production for the year), the world still saw excess production last year of 0.87 million barrels per day, about 0.16 million barrels per day than they thought in December, but this number should narrow to a disparity of 0.33 million barrels this year, an improvement for oil bulls of 0.10 million barrels per day over what I calculated a month earlier.

*Source: Created by author with data from the EIA's Short-Term Energy Outlook

Takeaway

Based on the data provided, it's clear that the global and US inventory picture for crude plus petroleum products is still unappealing (especially the global picture) but my feeling from this is that the data will likely prove to be too bearish in the respect that it is likely overstating global production for the year (unless OPEC doesn't adhere to its plan and non-OPEC nations also don't adhere). Regarding demand, I would argue that there's also some upside potential there but their forecast regarding this category is not wholly unreasonable and likely accounts for uncertainties relating to Brexit, a Trump presidency, and other miscellaneous factors.

Disclosure: I am/we are long LGCY, AREX, WLL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I own LGCYO and LGCY. I may end up buying CHK at some point too.