Oil Markets and Geopolitics – “It’s Complicated”
During late 2011, analysts (and experts!) were cutting their oil price and demand forecasts. Less than 60 days into the new year, they’re only partly right (or already partly wrong). Demand is, arguably, even more concerning than expected, with Spain/Portugal consumption lower by high single digits, and US gasoline consumption down 5% YoY despite favorable weather. The IEA has cut its 2012 estimate from 1.3 mmbd growth to 800,000 since Christmas, and the ‘year is young.’
Meanwhile, Brent is almost $20/barrel above the mid-December level, as concern about Iranian crude and improving Chinese demand buoy the market.
It was never about demand, which remains below trendline, in my view, but a variety of supply issues, notwithstanding Libya’s astonishing rebound (1.3 mmbd in January toward its 1.6-1.8 mmbd normalcy). Output has already slipped, for a variety of reasons, from Sudan, Yemen, and Russia, while further risks abound – primarily from Iran and Iraq. Iran has clearly failed to maintain its 3.7 mmbd longer term average (now around 3.5), efforts to curb domestic demand have largely failed, and MEES reports that the Iranian banking system is coming under great stress, as sanctions restrict money flows and NPLs have exploded amidst the weakened domestic economy. Less evident, but perhaps more likely, is the risk that Iraq will also fall short of expectations as secular strife fills the US/Allied vacuum. Another supply shortfall looms. Longer term, Kuwait has ‘changed ministers again,’ and scaled plans to reach 4 million b/d (from 2.7 mmbd today) by about 10%.
Face it. Emerging markets now drive the oil price. How frustrating, since the key US benchmark, WTI, is back to a $20 ish/bbl ($0.50/gallon!) discount to international prices, but product prices track the international tabs, where the marginal price is set. Are the refiners back in the driver’s seat, now that majors are nearly finished splitting/selling/shuttering assets?
What’s the Right Perspective – An Energy Independent US or North America?
Meanwhile, a backward look at US oil dynamics is encouraging. Gasoline demand fell 5% from the 2006 peak through 2011, but another 5% lower in January, YoY, despite easy comparisons. Crude imports are about 12% below 2006, and all petroleum imports (including product) is 25% below the same peak. Meanwhile, US crude production is 6% higher over the last five years, despite the headwinds from a post-Macondo moratorium.
Net-net, consumption is about 5% lower, and local production 6% higher. There are other complicating factors, such as biofuel mix, natural gas liquids, etc, but the energy economy is gradually becoming more efficient and self sufficient.
One executive believes the US could ADD 5 million b/b by 2020. Consensus is closer to 2-3 million b/d. Either way, the net import deficit could fall to half of the 2006 levels by the end of this decade. At $100 oil, the energy trade balance, once almost 100% of the monthly trade deficit (2008), is now around 50%, with more potential over time. And this doesn’t count the likely improvement in the gas trade balance, as Canadian imports slip and LNG export capacity develops in the next five years. I am NOT on the ‘energy independence’ wagon, but both supply and demand are contributing toward a ‘reduced lag,’ over time.
More interesting is the possibility of North American energy independence. If one considers the US AND Canada (clearly not the mindset of certain political interests as long as Keystone X/L remains a political football), the prospects for even more significant deficit reduction are very good. Canada exports 1.6 million b/d of oil, and over 1 million barrels (equivalent) per day of gas – with more growth in store if future oil stays in continent. In this opinion, opposition to retaining higher carbon petroleum product in North America ignores the more holistic consideration of the role of (a) combustion on the full cycle GHG analysis and (b) the GHG cost of export to less efficient (combustion) markets, among other issues.