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$85 Crude Oil By Christmas: An Interview
With Mike Rothman
Al-Jazeerah, CCUN, April 18, 2016
After a 50 percent rally in oil prices between February and March,
crude has retreated a bit as of late. The upcoming OPEC-Russia meeting in
Doha looms over the markets, but few expect the outcome to have any
material impact on supply and demand. Global supply still exceeds demand,
but there are solid signs that the overhang is finally starting to ease.
Storage levels are high, but are expected to come down.
that leave us? With so many energy investors unsure of where the markets
are heading, Oilprice.com decided to get
in touch with Mike Rothman at
a macro energy research firm that has produces some of the most accurate
data out there. Oil prices may be gyrating up and down, but Mr. Rothman
provided some juicy clues for investors, highlighting some key near-term
trends for crude oil.
A few topics covered:
IEA oil barrels
Why oil markets are tighter than people think
What to expect from the OPEC-Russia meeting in Doha
Why oil prices
Where investors should put their money
prediction for oil prices at the end of 2016
Oilprice.com: The IEA
has been accused of overestimating global supplies. The WSJ says that
somewhere around 800,000 barrels per day are unaccounted for, meaning they
are not consumed nor have they ended up in storage. Are these "missing"
barrels a big deal?
Mike Rothman: The issue has not been one of
the IEA over-estimating supply, but rather under-estimating demand. There
are basically two ways to arrive at figures for global oil demand. The IEA
methodology is built on an estimate of GDP and an assumed ratio of oil
demand growth to GDP growth.
For the emerging markets in
particular, that methodology represents a leap of faith since there are
>100 countries and close to real time measures for economic activity rank
up there with seeing unicorns and leprechauns. Also, in countries where we
have better and more timely data for demand and GDP (like the U.S.), we
see that oil demand growth to GDP growth ratio fluctuate sharply.
The other way to measure usage (which is what we do at Cornerstone
Analytics) is to assess how much physical oil the global system is
absorbing. It's called "apparent demand." It presumes global oil
production data is close to the mark - which is the evident historical
pattern - and that inventory changes in the OECD are the proxy for global
storage changes. Basically non-OECD countries use oil on a hand-to-mouth
basis with the primary exception really being China -- whose stockpiling
has actually been smaller than generally believed. "Missing oil" is the
gap that we see between econometrically estimated demand and apparent
demand. Historically, bouts of "missing oil" are resolved by the IEA
revising up its demand series. The underlying issue is generally an
underestimation of oil consumption in the non-OECD countries.
Are oil markets actually much tighter than everyone thinks?
Yes, in the sense that storage is not as high as generally presumed and
yes in the sense that OPEC's spare production capacity is much more
limited than generally believed. But, to be realistic, because petroleum
stocks in the OECD countries (which is the proxy for global stores) are
high, there is no real concern in the market about availability, yet. We
think this changes starting in the current quarter because we forecast
global oil inventories will be drawn down contra-seasonally.
What is Saudi Arabia's position coming into the production freeze? Are
they winning the oil war or are they rather desperate at this moment in
time? Data compiled by FGE energy consultancy
suggests that Saudi Arabia is losing its leadership position in 9 out of
15 of its major markets.
MR: Our sense is that Saudi Arabia
put itself in a position whereby it will wait for global supply/demand to
rebalance itself. Most market watchers don't really understand that back
in 2014, the Saudi aim was about coercing a handful of OPEC countries to
make production cuts to counter what was a collapse in the "financial
demand" for oil. While Saudi Arabia has been burning through $12-$15
billion per month from its financial reserves to fund government spending
through this period, it seems the policy is that the path to a much higher
price (and higher revenue) will come about by allowing for a prolonged low
OP: What can we realistically expect from the OPEC/non-OPEC
meeting in Doha?
MR: At most, countries may agree to freeze
output, which may sound encouraging but in reality is little more than an
agreement of the lowest common denominator since they are basically
capacity constrained to begin with. To defend a price, OPEC would need to
actively take barrels "out of the hands" of refiners that is, a
production cut, the current prospects for which lie somewhere between slim
OP: Do you expect oil to fall back below $30 if Doha
turns out to be disappointing?
MR: No, but that's partly because
we think the oil balance will be transitioning into a deficit in 2Q and
because many will come to realize that a production freeze is not a viable
plan to cause the oil balance to tighten.
OP: The oil industry is
making massive cuts in investment. Should we be bracing ourselves for a
price shock at some point in time? If yes when do you see this occurring?
MR: You cannot cut CAPEX and reduce upstream activity and somehow
think future production growth goes unaffected. We forecast non-OPEC
supply to contract this year for the first time since 2008. That was a
way-out-of-consensus call to make a year-ago when most pundits vigorously
argued non-OPEC production would still expand even with the drop in oil
prices. What we've communicated to our clients and those we deal with
directly in OPEC is that the spike down in oil prices is basically
setting up an eventual spike up.
OP: Will bankruptcies in the U.S.
shale industry do anything to balance the market?
MR: We expect
that it will feed into the contraction we forecast for U.S. output. We
also see the credit availability issue as likely being a limiting factor
moving forward, sort of like what we saw in 1986 and then again in 1999.
OP: Where should investors look if they want to put money in the
energy market? What types of companies will perform well over the next
MR: Since energy equities basically trade as a proxy for the
commodity, it's safe to say all boats rise when the tide comes in. The
beta" names typically include the Oil Services sector and E&Ps. The most
leveraged play would be the commodity itself (or a vehicle like the USO).
OP: Lenders to the oil and gas industry have been fairly lenient
with companies. Do you believe that the banks will start to tighten the
screws a bit more as the periodic credit redetermination period finishes
MR: The old joke is that bankers are the guys who will lend
you an umbrella and then ask to have it returned as soon as it starts to
rain. Yes, we think lending will become much more highly scrutinized and
financing less readily available.
OP: Can oil break out from $40
per barrel anytime soon?
MR: Sure. All it takes is one outage of
consequence. More generally, though, we think oil breaches $40 during 2Q
as physical evidence becomes available about inventories drawing down
OP: Where can you see oil heading over the next 3
months, 6 months and 1 year out?
Our target is Brent crude at $85
by the end of 2016.
OP: How do you see the U.S. presidential
elections impact U.S. oil and gas policies? What could be the most radical
change for oil and gas?
Ask me after the election
Thanks for taking the time to speak with us Mike.
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