The production data, for the past few quarters, on oil and gas products in the United States indicates that the industry is soaring to new heights; and although the data is not finalized for the second quarter of 2018, the estimates are adding up pretty good, despite the political discussions relating to tariffs and retaliatory tariffs. Here are some key points as published by the US Energy Information Administration (EIA) and the American Petroleum Institute (API) for June 2018:

  • 10.7 million barrels per day of crude oil production, a record

  • 4.2 million barrels per day of natural gas liquids, a record

  • 2.3 million barrels per day of crude oil exports, a record

  • 18.0 million barrels per day of gross refinery input, a record

  • 20.6 million barrels per day US petroleum demand, highest since 2007

  • 96.8% refinery utilization rate, highest since 2005

chart

Record Oil Field Production

Petroleum production is definitely ramping up. The main reason is hydraulic fracking. This technology made it possible for the United States to produce light sweet crude as good as any that comes from Saudi Arabia. In 1990, I worked on a refinery in El Paso, Texas whose feed stock was West Texas Sour.  Today, that refinery takes West Texas Intermediate, a very light and sweet crude.  The rig count in the Permian basin has increased significantly over the past few years. Efficiency and technology are the main drivers propelling the United States into one of the great oil producers globally.

Karr Ingham, petroleum economist for the Texas Alliance of Energy Producers, states, “We’ve seen extraordinary expansions in Texas oil and gas activity over the 23 year history of the Texas Petro Index”. The Texas Petro Index is a measuring device, tracking growth rates and business cycles in the Texas oil and gas E&P economy. Ingham continues, “What makes this cycle unique is the sheer amount of crude oil and natural gas produced in the State – and the growth rates in production – at lower levels of activity compared to the peak levels from the previous growth cycle”.

Inventories

Crude Oil and Petroleum Products Are at Near Record Levels

Since 2015, petroleum related inventories have surged to heights not seen before in American history. Much of the increase occurred in recent years when Saudi Arabia claimed that its policy is to let “market forces” drive the price of oil. The Saudis opened up valves to oil production and the American oil industry came crashing down. The price of oil dropped to below $30 per barrel and the United States oil industry experienced a recession not seen in a generation.

Today the story is different. A few of the really big oil producers in OPEC have agreed to curb production. In some countries, political unrest has throttled the country’s ability to produce oil. For June 2018, the following countries have turned down production:

  • Venezuela, 590 kb/d

  • Angola, 260 kb/d

  • Libya, 150 kb/d

  • Nigeria 130 kb/d

Russia and Saudi Arabia are increasing their production levels.

One of the reasons that United States inventories for petroleum related products have dropped recently is the cut backs in petroleum production by other nations. But another reason, is that world GDP is rising and that means global demand for petroleum is also rising. In the future, the top players in this industry will be those who can produce oil the most efficiently; and the United States, Russia, and Saudi Arabia are definitely among those ranks.

Oil Market Stagnation Ahead

EIA estimates that, in the second quarter of 2018, crude oil supply will outpace demand in the global market. This trend is expected to continue through the year for 2018. Although a market crash is not predicted, a plateau in the oil industry is definitely expected that should last until 2020.

Bloomberg reports that World Bank predicts a 2.7% GDP growth rate in the United States for 2018; and adds that the grow rates for 2019 and 2020 are expected to be 2.5% and 2.0% respectively. World Bank also expects global GDP growth to float around 3.0% between 2018 and 2020. This does not mean economic disaster; but with oil supply out running demand and GDP growth slowing slightly in the world arena, caution is advised – especially when US inventories are still at historically high levels.

Sarah Emerson, president of Energy Security Analysis Inc, states, “There is a misperception that a supply crunch is imminent. In a five-year horizon, the potential for non-OPEC supply growth is impressive. This will have a bearing on the degree to which OPEC will have to dip into spare capacity to offset disruptions.”

Trade Wars and the Future

The Trump Administration is very vocal about trade imbalances, protectionism, and tariffs. If history is any indicator of how things work, one should not be too worried. The Great Depression serves as a good model example of what “not to do”

In his book, “New Deal or Raw Deal?”, 2008, Burton Folsom, history professor at Hillsdale College, states that 3 simultaneous factors caused the Great Depression: 1. High Federal debt, 2. Tariffs imposed on other nations, and 3. High Federal interest rates. The United States is currently 2 for 3 on this issue. Everything in the economy should be fine so long as the Federal Reserve does not go “bezerk” with interest rate hikes. The moment people are fully employed and inflationary pressures start, the first thing the Fed does is pull the trigger on interest rates – and typically with disastrous effects. Two notable examples are the oil crisis in the early 1980s and the housing crash in the first decade of this century.

Some are worried that the United States is showing high levels of protectionism – going against modern economic theory and comparative advantage, etc. Well, as John Hobson says in his book, “The Evolution of Modern Capitalism”, 1906, it was the tariffs of the late 1800s that made the United States an economic powerhouse. That is, American industry was protected from foreign competition; and thus, allowed to grow.

On a final note, the USA has just finalized sanctions on Iran.  Oil prices are predicted to hit $90/barrel in the 4th quarter of 2018.  There is a lot of production capacity in the world.  Exactly how the geopolitics plays out and affects the oil market is yet to be seen.

 

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