Crude Oil Is Everywhere – Armored Wolf May Letter

Certainly oil is ‘everywhere’, here in Southern California. Earlier this month, there was an under-sea pipeline that ruptured in Santa Barbara. Following, local news reported globs of tar washing up on the Redondo Beach, shutting down surf shops. ‘Everywhere’, obviously far extends beyond surf shops. In fact, it extends far beyond Southern California.

I am, of course, referring to ‘everywhere’ in terms of driving financial markets and ‘everywhere’ in terms of global inventories overflowing traditional storage facilities.

The IEA looks at global (OECD) inventories, and on May 13 concluded: “Preliminary data indicate that OECD stocks have continued on an upward trend as they built by 35.8 mb in April. Crude stocks added an exceptionally steep 36.4 mb led by still-soaring US holdings.”

Noting that April has 30 days, it follows that global output exceeds global consumption by 1 million barrels per day. There is a supply/demand imbalance globally.

Though the formatting is different, the picture painted by the US Department of Energy (DOE) is no different. Take a look at this chart, sent to me by Sol Steinberg, Founding Principal, OTC Partners in Chicago, plotting DOE US inventory data. It shows the past five years of high and low US Crude Inventories (X-SPR) together with this year’s breakout.

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articular, rather than production decreasing, product inventories have surged as they normally do ahead of the summer driving season. In addition, the flattening of US Production in recent weeks has been offset by increases in production in Saudi Arabia. Beyond Saudi Arabia the major and minor oil exporters globally are experiencing extreme political stress, and pressure to increase oil revenues by increasing production in response to the lower global prices. To the extent their lifting costs are in the single digits a globally competitive oil market equilibrium involves them continuing to pump until the MARGINAL producer is forced (by lower prices) to reduce supply.

Michael Dooley, of Cabezon Investment Group (among other distinguished academic and NGO titles), made a related point at the recently convened Drobny Global 2015 Santa Monica Conference. More specifically, he observed that demand for oil in OECD countries peaked in 2005 and has been on a declining trend since then. His conclusion is that long dated oil should be sold. His case is solid.

In particular he points out that a) technology is allowing supply to be created more and more cheaply. More specifically well data, from the Bakken and Eagleford Light Tight Oil (LTO) regions of the US, shows drillers are experiencing dramatically greater output per well, at dramatically lower cost per well, sequentially year after year. Petroleum engineers are delivering huge efficiency gains in Shale Oil., b.) demand globally is falling and c) drillers are “capping” wells currently, which means that in addition to above ground inventories being bloated, there are underground inventories that can be, and will have to be tapped, before

Full letter below

Armored_Wolf_May_2015 (1)

Oil

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