[TonyPrep]

As a counter to the hypothesis that consumption is diving and stocks are rising, the recently released Short Term Energy Outlook, from the EIA, estimates that consumption exceeded production for the last 3 months of 2008. The eye-popping estimate for December has consumption running 4.04 million barrels per day above production.

Are we about to experience a hyper spike in the oil price, or are the recent estimates from the EIA complete garbage?

[TheDude]

Good catch, Tony. Ostensibly OPEC is just getting warmed up with production cuts, and I've wondered if this couldn't lead to shortages at some point, noticing other indicators of demand rebounding. Or OPEC achieving their desired goal of a higher price for crude - possibly mucking up the desired economic rebound, giving pols more slabs of nice fresh scapegoat.

This will be yet another rollercoaster ride of a year, I'm thinking.

[TonyPrep]

Ostensibly OPEC is just getting warmed up with production cuts

One would think so, but the latest STEO also provides little support for the notion of significant OPEC cuts. About 2.5 mbpd, I think, had been agreed up to the end of last year but, I don't see that in the figures, though production is down 1.8 mbpd, from the July peak.

This will be yet another rollercoaster ride of a year, I'm thinking.

It's starting to look that way. The gap estimated by the STEO, for October and November, has been widening as estimates get revised, not the reverse, as might be expected. So the global markets seem to be disconnected from reality, at the moment. When they connect with reality, who knows what will happen?

On the markets, I notice that Nymex future and WTI spot prices have been heading down (though not in the last few hours), whilst Brent crude has been headed up, with the latter now trading at a 6-7 dollar premium, which is pretty unusual.

I feel something has to give, but if economies crash this year, maybe the imagined dive in demand will actually materialise. As always, the coming year is looking interesting.

[ROCKMAN]

Tony,

I see things pretty much the same as you and the Dude. I just think it takes a bit longer then most expect these changes to take place. For instances I think we're many months away from seeing the final DD caused by the economic slump. I'll also guess we won't see OPEC cuts materialize significantly for another 2 or 3 months at least. Those two factors along make price prediction foolish IMO. All depends on who wins the race: DD or OPEC cuts. Other then the stock market and futures the system is just too big to react quickly to changes.

But I do think NG might be a shocker to many in a year or so. The unconventional NG plays are cutting back big time. Those high depeltion rates will cut supply significantly in the nest 12 - 18 months. But then it get's back to the rate of DD...especial on the commercial side of the fence.

[dissident]

Let's not forget that a lot of demand was destroyed by the high oil price. This component of the demand is recovering in places where the demand was reduced not out of choice but out of necessity.

The current price low is just as transient as the summer price spike. The oil price in 2009 will not average $35 or less.

[JohnDenver]

Are we about to experience a hyper spike in the oil price, or are the recent estimates from the EIA complete garbage?

I'm inclined to think the latter. What methodology does the EIA use to make those estimates? Can you give me a convincing reason why those estimates should be trusted?

If demand is massively outstripping supply, what is the mechanism that is keeping the price down? And how is it that stockpiles are surging?

Abundant oil supplies in a decreasing market and dropping tanker freight rates have combined to form an increase in floating storage, said the International Energy Agency in its monthly oil market report. Tanker operator Frontline Ltd. said 20-25 oil supertankers, representing 50 million bbl of oil storage capacity have been hired for floating storage in recent weeks.

Link

Inventories in Cushing, Okla., the delivery point for futures traded on the New York Mercantile Exchange, have jumped more than 40% in the month ended Jan. 2 to the highest level since at least April, 2004, when the government started collecting Cushing data.

Link

We're currently in a super-contango that enables risk-free profit to those who can store physical oil. So I don't think the stock builds are illusory.

[centralstump]

The 881/2 mbd in December is a record is it not? That has got to be wrong.

[TonyPrep]

Are we about to experience a hyper spike in the oil price, or are the recent estimates from the EIA complete garbage?

I'm inclined to think the latter. What methodology does the EIA use to make those estimates? Can you give me a convincing reason why those estimates should be trusted?

To be honest, I've no idea why they should be trusted. However, I offer this. I've noted that many supply deficits over the past year seemed to get revised to slight surpluses, in later STEOs. However, the deficits in October and November actually got revised as bigger deficits. This wasn't what I was expecting. Now, the EIA, the IEA and OPEC are the only sources of data that the public have access to, on a monthly basis. Should we disregard all the data? I've heard that the weekly stock estimates are very dodgy but the best in the business, but they seem to be accepted without question. Why? The STEO gives very early estimates for the most recent month, so one would expect significant revisions over time. Maybe the increasing deficits of the last 3 months will turn out to be surpluses but it's not looking like heading that way, at the moment.

If demand is massively outstripping supply, what is the mechanism that is keeping the price down? And how is it that stockpiles are surging?

Demand isn't massively outstripping supply but consumption seems to be massively outstripping production. I don't have any estimates of global stocks, other than the STEO numbers. Can you point to opposing data that shows global (not US or OECD) stocks surging?

Abundant oil supplies in a decreasing market and dropping tanker freight rates have combined to form an increase in floating storage, said the International Energy Agency in its monthly oil market report. Tanker operator Frontline Ltd. said 20-25 oil supertankers, representing 50 million bbl of oil storage capacity have been hired for floating storage in recent weeks.

Has this story been verified and is this a reliable indicator of Global stocks?

[TonyPrep]

The 881/2 mbd in December is a record is it not? That has got to be wrong.

I'll admit that that was my first reaction. But I wonder if the ever decreasing oil price has encouraged higher (perhaps less efficient) use of oil, despite the recessions dotted around the globe. Certainly use in the US is down a little but maybe the rest of the world is compensating, overall.

Having said that, I do expect a big downward revision in a month's time, but I have no idea if the estimates will still show an excess of consumption over production. We shall have to wait and see, though the IEA oil market report is out soon and that usually has a yearly consumption estimate, so maybe we'll get a hint from that (though most of us will probably have to wait until near the end of the month to see the full data).

[ROCKMAN]

Tony,

Pretty good summery of where we're at right now IMO. Not that cycles repeat themselves exactly, but my memory is that the big demand destruction of the early 80's took many months to materialize in a significant manner. Granted the boom/bust cycles seems to be occurring every quicker but I still suspect commercial DD has a way to go before we see the bulk of its related drop. And given what appears to be worsening economic conditions it's bottom may be as much as a year off. That's one reason I believe OPEC will maintain ever increasing efforts to lower production levels to prevent a prolonged and, perhaps greater, price destruction. Gasoline consumption can and did seem to drop over night. But it has the same ability to rebound just as rapidly. Certainly if the economy hadn't taken a hit we would probably be setting record gasoline consumption with today's low prices.

So we're back to the same foot race between DD and production cuts by OPEC. But the rapid decline in Cantarell Field and the likely suspension of many new oil projects might make the race an even money bet IMO.

[TonyPrep]

Spot on ROCKMAN, although if the economy hadn't taken a hit, I doubt that we'd see oil prices so low. Low prices are bound to mitigate DD, to some degree but it's not clear just how much mitigation. I think it'll take a few months before we've got a clear idea on that. By then, however, the point may be moot, depending on how the economy goes.

[aahala2]

As a counter to the hypothesis that consumption is diving and stocks are rising, the recently released Short Term Energy Outlook, from the EIA, estimates that consumption exceeded production for the last 3 months of 2008. The eye-popping estimate for December has consumption running 4.04 million barrels per day above production.

I don't see what you see on this. I see the 4 mbd difference, but why is this eye-popping?

Production and consumption as shown on the chart are measuring different things. Production is crude oil, NG plant liquids etc. Consumption is measuring "petroleum product supplied" for the majority of countries(which includes the volume of all non-oil additives, like ethanol) and for the non-OECD countries "apparant consumption". Apparent consumption sounds like an estimate to me.

There may be seasonality or timing involved as well. One month does not necessarily matter. I went back on the table to 2002 I believe it was and in every December since, production was less than consumption. It were fairly substantial diffferences in some years and fairly even in others.

[TonyPrep]

I don't see what you see on this. I see the 4 mbd difference, butwhy is this eye-popping?

Because it is much larger than any deficit for the last 6 years, well over double all previous December deficits, since 2002 (which was 10% lower than the latest estimate) and completely counter to the perceived wisdom that demand is crashing.

Production and consumption as shown on the chart are measuring different things.

Yes, because crude oil needs to be processed to be used. The difference is entirely consistent with the stock draw line, however. Positive stock draw is an indication that production is not meeting consumption of the stuff that people use.

Apparent consumption sounds like an estimate to me.

The whole table is an estimate, which is why I usually use the word, when referring to data sets like this.

I went back on the table to 2002 I believe it was and in every December since, production was less than consumption. It were fairly substantial diffferences in some years and fairly even in others.

All Decembers during that period showed deficits well down on December 2008. It was eye-popping to me because it was at least double all previous Decembers during the period back to 2003, significantly higher than December 2002, and well over double the deficits in Decembers 2001 and 2000. December 1999 would also have been eye-popping, at over 5 mbpd.

If you think the gap is normal, especially given the constant talk of demand destruction, then that's up to you. I think it's eye-popping and worthy of some debate, though revisions may make it less so.

[Electric_Economy_2025]

If production is 4mbpd below consumption then why is the price of oil so cheap ?

[misterno]

If production is 4mbpd below consumption then why is the price of oil so cheap ?

Good question and here is my question; In that report it says 2008 december annual consumption is 88.4. If this is true, we have a new world record which bears 2 questions?

1) Howcome the consumption is breaking records in a year where in the middle of it we were hit by a recession worldwide?

2) If the worldwide production decrease from known sources is around %6-7, then where does the difference plus the increase come from to make it up to 88.4?

I am totally confused...

[dohboi]

Perhaps we have already passed the peak for realiable and accurate information on anything having to do with oil?

Who knows? Maybe we passed that peak long ago and we've all been using funny figures for years.

The fact that standard measures shifted from crude oil to "all fluids" a couple years ago tells me that someone is having a bit of fun with the numbers on that front at least. Since "all fuels" presumably include various biofuels that take enormous quantities of oil to produce, probably in some cases more in energy terms than they get out, there is clearly some double counting going on with that which makes it quite a bit worse than useless.

[ROCKMAN]

I would agree with you at least partially dohboi. But I think the basic problem is the same it has always been: rough estimates combined with a time slower then most want to accept. Oil production (and its estimates) just don't work well with the 24 hour news cycle. Looking at reported numbers effective 3 or 4 months ago can work. Given the fast changing environment I just don't think estmates work very well right now. OPEC may be keeping to their targeted cuts but it takes a couple of months to see the net results. I'm sure that 3 or so months down the road what actually happened the first two months of this year will be much clearer.

[TonyPrep]

Since "all fuels" presumably include various biofuels that take enormous quantities of oil to produce, probably in some cases more in energy terms than they get out, there is clearly some double counting going on with that which makes it quite a bit worse than useless.

Which is why I think it's important to look at both consumption and production figures together. We did see an uptick in total liquids, around the turn of 2008, and that may have been primarily biiofuels. But they also affect the consumption side. Production may go up because of biofuels but consumption should also rise by almost as much, cancelling out much of that production rise.

But, yes,figures aren't completely reliable and take a lot of guesswork on the part of the estimators.

[yesplease]

Since "all fuels" presumably include various biofuels that take enormous quantities of oil to produce, probably in some cases more in energy terms than they get out, there is clearly some double counting going on with that which makes it quite a bit worse than useless.

If by "enormous quantities of oil" you mean we're trading about one gallon of liquid fuel for one and a half to two gallons of liquid fuel, then we're on the same page.

[yesplease]

I don't see what you see on this. I see the 4 mbd difference, butwhy is this eye-popping?

Because it is much larger than any deficit for the last 6 years, well over double all previous December deficits, since 2002 (which was 10% lower than the latest estimate) and completely counter to the perceived wisdom that demand is crashing.

To be fair, the price run up to $145/bbl was associated with about one straight year, 11 out of 12 months specifically, of consumption exceeding production, with the previous two years following the same pattern, although there were more months where production exceeded consumption. I'm thinking it's a symptom of $35/bbl crude as opposed to a new trend, and it appears as if that's what most people in the market think too, but if this continues for the next year or few I expect prices would head upward just like they did over the past few years.