Now You See it - The Energy Report 05/12/16

Now you see it and now you don’t. Presto chango and all of a sudden barrels of crude are disappearing at a time when demand is rising causing a path to global oil supply tightening. Not only did the Energy Information Administration (EIA) shock the trade with a 3.5 million barrels’ drawdown, the International Energy Agency (IEA) is lifting its global demand forecast. This comes as U.S. crude oil production falls again and lost production from Nigeria, Canada, Libya and lower production from Iran and Venezuela.  Is it any wonder that crude oil closed at a 6 month high?

The International Energy Agency (IEA) is starting to see more oil demand growth led by India and the United States. The IEA said that demand growth in the first three months of 2016 was 200,000 barrels a day higher than they had predicted before coming in at a whopping 1.4 million barrels of oil a day. The IEA said that “India saw the largest volume growth globally. With demand at 4.4m b/d in the first quarter.”

It seems that that India is picking up where China left off and low prices globally are fueling demand growth in India the same way low prices helped fuel demand growth in China in the beginning of the millennium. While many are focused on China demand the real growth is in India, even as China continues to import record amounts of crude oil. The IEA is also acknowledging the growth in U.S. gasoline demand that is near all-time record highs. The IEA put gas demand at 9.65 million barrels a day! They also see global oil stocks rising by just 200,000 in the remainder of the year much less than previously forecast. The oil glut at this rate could soon disappear. Poof!  If it were not for the listing of Iranian sanctions the market already would be at a deficit. The IEA said Iran has filled the void.

The Energy Information Administration (EIA) arm of the U.S. Department of Energy also is looking for strong demand growth. The EIA says that world energy consumption is projected to increase by 48% over the next three decades, led by strong increases in the developing world—especially in Asia. They point to rising incomes in China, India, and other emerging Asia economies are a key driver of the global energy outlook. Developing Asia accounts for more than half of the projected increase in global energy use through 2040.

Yet with oil companies walking away from long term projects it is unclear how that demand will be met in the future. There have also been disruptions to supply in Opec countries such as Libya, Nigeria — Shell this week declared force majeure on Bonny Light output — and Venezuela, where it has been difficult to maintain operations in the face of power cuts.

We have been talking about the impact of the oil price crash for some time and how we were planting the seeds for the next big oil rally. The crash in price caused to a historic drop in oil rig counts as producers have cut to the bare bones. The industry has been hit with a wave of bankruptcies making it more difficult to resume production. Oil majors have cut spending by billions and billions of dollars walking away from major oil projects around the globe. We have lost billions and billions of barrels of future oil production. Now add more geopolitical risk and oil sands risk and you all of a sudden lay the groundwork for a supply squeeze in the future.  We have called this a generational bottom and the evidence seems to be mounting to support my long term bullish case. The biggest threat to the call is some type of economic calamity. Without it we are on the road to the new super spike in oil.

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