Fractional Flow

In this post I present some selected parameters I monitor which may help understand near term (2-3 years) oil price movements and levels.

It has been my understanding for some time that the formulations of fiscal and monetary policies also affects the commodities markets. Changes to total global debt has and will continue to affect consumers’/societies’ affordability and thus also the price formation of oil.

I have earlier asserted;

Any forecasts of oil (and gas) demand/supplies and oil price trajectories are NOT very helpful if they do not incorporate forecasts for changes to total global credit/debt, interest rates and developments to consumers’/societies’ affordability.

• The permanence of the global supply overhang could be prolonged if consumption/demand developments soften/weakens and it is not possible to rule out a near term decline.
• Recent demand/consumption data for total US petroleum products supplied show signs of saturation which provides headwinds for any upwards movements in the oil price.
• While prices were high many oil companies went deeper into debt in a bid to increase production of costlier oil. Many responded to the price collapse with attempts to sustain/grow production in efforts to moderate cash flow declines and thus ease debt service.
• If the forward [futures] curve moves from a present weak contango (ref also figure 02) to backwardation, this would erode support for the oil price.
• Some suggest that growth from India will take over as China’s growth slows.
  Looking at the data from the Bank for International Settlements (BIS) there is nothing there that now suggests India (refer also figure 05) has started to accelerate its debt expansion. The Indian Rupee has depreciated versus the US dollar, thus offsetting some of the stimulative consumption effects from a lower oil price.

The recent weeks oil price volatility has likely been influenced by several factors like short squeezes, rumors and fluid sentiments.

Near term factors that likely will move the oil price higher.

• Continued growth in debt primarily in China and the US. {This will go on until it cannot!}
• Another round with concerted efforts of the major central banks with lower interest rates and quantitative easing.

And/or

• A tightening in the global oil demand/supply balance from whatever reasons.

I also believe that D E M A N D (consumption) developments now are more important than widely recognized and that demand/consumption developments will play a major factor in as from when oil prices will regain support to move to a sustainable higher level.

I now hold it 90% probable that the oil price will enter a new leg down, and that the low in January 2016 could be taken out.

Recently the total US petroleum demand growth had two components

1. Growth in consumption, mainly driven by the collapse of the oil price
2. Noticeable growth in petroleum stocks (primarily crude oil) since late 2014 driven by a favorable contango.

The combined effects from these grew annualized US petroleum demand by 1.3 Mb/d relative to January 2014 (ref also figure 01). US consumption growth has now stalled, which may suggest saturation from the lower oil price is about to be reached.

A weakened contango (ref also figure 02) will likely reduce demand for storage.

Continue reading “The Oil Price – Some (Mar-16) Observations and Thoughts”