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Oil Glut: IT’S THE DEMAND, STUPID!

Consumption

Discuss this article at the Energy Table inside the Diner

I ran across a chart on Bloomberg which is perhaps the best demonstration to date that the Oil Economy is in Full On Collapse mode now.  The chart is of Oil Inventory in storage, and covers the last 35 years since 1982 of Oil Inventory in the FSoA, and is the Header Pic for this article.

Do you note the Hockey Stick nature of this graph?  For 35 years until 2014, Oil Inventories were kept within a very narrow range.  Supply & Demand were kept in balance by the folks in control of both the extraction of Oil and the production of money.  A more or less steady “growth” rate of the entire system was maintained, as oil output and population increased, the money supply increased in tandem with it, a couple of percentage points ahead which provided return on investment for those in charge of creating the money in the first place.  For everyone else, this appeared as Inflation as the cost of housing, food and just about everything else besides techological gizmos kept spiralling upward.

However, even through all the recessions through the 1980s to today, Oil Inventories always stayed inside this narrow range.  That includes the Great Recession following the 2008 Financial Crisis.  Something CHANGED in 2014 though, and my good friend Steve Ludlum of Economic Undertow pegged it to the month more than 2 years in advance with his “Triangle of Doom”.  What changed at this time was that the cost of extracting oil went higher than the price the customers could afford to burn it at.  The price crashed, from over $100/bbl down to $40/bbl or so.

Charts by Steve Ludlum of Economic Undertow

August 2012 Prediction

April 2015 Reality

At this price, virtually nobody extracting oil makes a profit.  A few folks like the Saudis still have Legacy fields they can extract oil at a profit at $20/bbl, but across the whole of Saudi ARAMCO their costs are a good deal higher than that.  Here in Amerika, the Frackers may have got their extraction costs down to $60/bbl in some of their better fields, but they’re still not making a profit at $50/bbl.  Just not bleeding money quite so fast,and if they are TBTF, then Wall Street keeps rolling over their loans to keep them floating another day.  This is better in the short term than having to write down $Billions$ in losses, which then would make the bank itself insolvent.

So what has occured here in the Oil Trading market since 2014?  Well, Oil Traders keep holding back selling until they can make a profit.  But in the $50 range they mostly can’t, so the oil stays in a tank somewhere while they wait for the price to go back up, but it doesn’t.  Meanwhile, the Extractors of Oil all around the world keep extracting, because they have to do that to pay their bills.  Crude keeps piling up because Konsumers refuse to burn the shit fast enough, because they can’t AFFORD to burn it faster!

Until they lower the price DRASTICALLY, the glut will continue to accumulate.  Eventually here, they will run OUT of tanks to store this shit in, and it does cost money every day to keep the Oil you bought at one price stored in a tank somewhere to sell on another later date at the higher price you hope for.  NOBODY wants to “buy high, sell low”!  That’s a recipe for Bankruptcy of course.  So they keep the oil in the tanks, and they keep filling up more and more.

http://mothership.sg/wp-content/uploads/bfi_thumb/singapore-oil-tankers-31i6wvxb4bmus6w8k6y496.jpg

Oil Tanker Parking Lot off Singapore

Inevitably, a LIQUIDATION SALE has to come here.  There is not endless room for storage of this stuff above ground, and besides that it’s expensive to store all that oil. Whoever owns it is bleeding red ink as long as they hold onto it.

https://i.ytimg.com/vi/Jl31yVfJqW8/maxresdefault.jpg

Now, whenever you read any of the Oil pundits, they will tell you the reason for the glut is either OPEC members cheating on their quotas, Iranians bringing more Oil online or FSoA shale frackers drilling more wells.  But is the total global production really up all that much?  No, in fact it’s been going down since it peaked in August of 2015.  So if it’s not the supply going up, why the glut?

IT’S THE DEMAND, STUPID!

Because they massage the figures everywhere else in the economy to show “growth” and nobody wants to admit being in a recession, Oil inventory keeps growing.  This figure you can’t massage (well not too much), because the stuff is a physical quantity that has to be stored in…something.  So they have to know where they are going to put it.

Oil is a Global Commodity, in which the FSoA is among the largest consumers but it’s not the only consumer.  Europe as a whole consumes a lot, China consumes a lot also.  All the consumption is not Happy Motoring either, a lot of it is industrial consumption.  Globally in aggregate, if the economy was truly growing we would be consuming more Oil, not less.

Sometimes when I make the Demand Argument with respect to both the price and the glut, critics will tell me, “But RE, the traffic is just as bad as ever and everybody in my neighborhood is still driving gas guzzling SUVs!”.  Well, that may be true in your neighborhood, but in somebody’s neighborhood somewhere it’s definitely NOT true.

My best guess is most of the reduction in demand is coming from southern Europe, where they have been in severe recession for years now.  This is probably also bleeding into the Chinese manufacturing sector with declining demand for their toys.  So then they use less Oil in the manufacturing process.

http://1.bp.blogspot.com/-NvN1KaOxdJ4/UuGKXYTpM1I/AAAAAAAAKB8/j009d-0L_2c/s1600/Italy_Oil_Gas.png

With a declining amount of total production, along with a Hockey Stick graph of skyrocketing inventory, the only answer can be declining global demand for Oil.  In order to get the demand up, they have to drop the price down.  But they’re already losing money at the current price in the $50 range.  So the traders keep hanging on for the day the demand will magically rebound here and the consumers will step back up to the pump and pay the prices they need to make a profit.  There is however no reason at the moment to believe that the consumers will magically get more money to pay more for the oil, they already have trouble paying for it at the price it is selling for now.

http://www.artberman.com/wp-content/uploads/Chart_World-Con-Uncon-1.jpg

Unlike the magical world of Money where you can conjure as many digibits as you want out of thin air and which takes virtually no room to store inside a laptop, Oil is a physical commodity which must be burned to have value.  If it’s not burned as fast as it is pumped, then it’s going to lose value.  The traders don’t want to recognize the loss of value though, because they will take a serious bath.  A bloodbath.  They don’t have to take the write down though until they actually sell the stuff.  So they don’t sell, they keep it stored on a tanker somewhere and pay the daily storage fees out of more borrowed money, which the banks keep lending them because they will go tits up when the traders they lent money to go tits up. No matter how much money they lend to keep storing the Oil though, eventually they’re going to run out of room.  Then EVERYBODY will HAVE to stop pumping Oil until they work through the glut.  Given there is double the normal inventory, this could take a little while.  Can any Oil Producing nation go even a week without the revenue from their Oil?

This condition of extreme glut has to break, and the only way to break it is a major reduction in the price.  When that comes, there will be carnage all across the energy and banking industries.  I don’t know how long before the last storage tank and VLCC tanker will be full up, but I can’t imagine it is too far off.  The End Game Approaches.

http://archive.globalgamejam.org/sites/default/files/uploads/2011/9387/The%20End%20Game.png?1296396579



31 Comments on "Oil Glut: IT’S THE DEMAND, STUPID!"

  1. Cloggie on Sun, 5th Mar 2017 7:31 am 

    Don’t worry about fossil fuel reserves, but follow the EU example and plan for the transition towards renewable energy.

    It’s not rocket science.

  2. onlooker on Sun, 5th Mar 2017 7:44 am 

    Wow this article hits the nail on the head
    Best oil article ever here!

  3. Cloggie on Sun, 5th Mar 2017 7:55 am 

    Time for a classic Rockman intervention.

    What we can conclude is that the world is not going to run out of fuel any time soon.

    And that a major shake-out in the oil industry is to be expected.

    So demand is retreating. Causes?

    Renewable energy.
    Energy conservation.

  4. Wm-scott on Sun, 5th Mar 2017 8:19 am 

    Excellent article.The tide has gone out and we now see who isn’t wearing swimming trunks. Since Planty has been caught skinny dipping, she is going to buy a round of drinks for all the posters on Peak Oil. Right after Trump gives Hilary a big kiss on the lips.

  5. Boat on Sun, 5th Mar 2017 8:42 am 

    Since 1950 demand average has been around 1.3 Mbpd. It is the producers that have trouble keeping a steady flow of oil. Lybia added 400,000 bpd recently and may have just lost it it due to conflict. Look for prices to jump near term. Geopolitics has everything to do with most over/under production and little to do with a relative steady demand history.

  6. onlooker on Sun, 5th Mar 2017 9:06 am 

    Sorry Clog this statistic fizzes out your renewable exuberance “How much of the world’s energy comes from renewable sources?

    In 2012, the world relied on renewable sources for around 13.2% of its total primary energy supply.”
    https://www.iea.org/about/faqs/renewableenergy/

  7. Rockman on Sun, 5th Mar 2017 9:23 am 

    Cloggie – Yes but just enough time to hit a couple of critical points.

    “At this price, virtually nobody extracting oil makes a profit. A few folks like the Saudis still have Legacy fields they can extract oil at a profit at $20/bbl, but across the whole of Saudi ARAMCO their costs are a good deal higher than that. ” From the context they are talking about lifting costs although they slip back and forth with costs to develop new production. Virtually every bbl of oil produced to generates a positive cash flow. Thus no company is “loosing money” producing oil. Which is not the same as suffering a lose on the initial investment. Don’t know what the KSA lifting costs are by my current costs range between $0.75 to $2.50 per bbl. Given the average US oil well produces less the 15 bopd and they are generation positive cash flow their lifting costs must also be relatively low. And given all of the Rockan’s we’ll have recovered at least 100% of their costs even if oil were to drop to $3/bbl everyone would still be profitable and would be economical to keep producing.

    Breakfast has arrived…more to follow

  8. Rockman on Sun, 5th Mar 2017 10:01 am 

    Now the “legacy field” BS. The majority of US oil production today is from legacy fields: about 80% of all US wells (around 285,000) produce 20 bopd or less. And that average includes all the new shale wells. The field the Rockman is redeveloping is 71 years old. The field they are injecting CO2 into for EOR (the largest sequestration project on the planet) is 72 years old.

    Now storage: notice the hundreds of millions of bbls held in storage at anytime? That’s called working storage and is part of the production/transportation/refining dynamic that has always existed and has nothing to do with long term storage.

    So long term storage: who is doing it and why. Well, not the Rockman, that’s for sure. Why? If I didn’t have a buyer for my oil or didn’t like the price I’m offered why would I spend money to produce it, spend money to transport it and then spend more money to store it? Contemplate that while I pay for breakfast.

  9. Cloggie on Sun, 5th Mar 2017 10:10 am 

    Given the average US oil well produces less the 15 bopd

    If I’m allowed to interject that a North Sea 6 MW wind turbine produces produces the eqivalent of 88 bopd (ok, 44 after including standard 50% down times) for 25 years on end and likely much longer.

    And since a windturbine produces high-grade electricity, not heat like from burned oil, I stick to my 88 bopd equivalent.

    https://deepresource.wordpress.com/2017/01/07/gold-mine-north-sea/

  10. Rockman on Sun, 5th Mar 2017 10:15 am 

    So it’s a very simple question: why would any company spend money to produce and store oil he doesn’t sell for whatever reason when he can simply reduce production from his wells and keep those reserves in the ground FOR FREE.? And potentially sell them for a higher price later.

    So who bought those bbls of oil and is paying to hold them in storage? And a much more important question: why? Contemplate that for a while as I continue my trip to one of my wells. The Rockman don’t text while driving. LOL.

  11. onlooker on Sun, 5th Mar 2017 10:41 am 

    Rockman, maybe the Oil companies need to gamble on prices rising because they need revenue desperately to maintain their reserves, pay bills and of course keep production going. Thus, the decision to continue extracting

  12. Outcast_Searcher on Sun, 5th Mar 2017 11:00 am 

    ” What changed at this time was that the cost of extracting oil went higher than the price the customers could afford to burn it at.”

    This is complete nonsense.

    First, oil product consumers don’t care about the price of extraction. They care about the MARKET price. Second, if you look at ANY global consumption curve for oil, aside from the 2008-2009 financial panic, oil consumption continues to rise EVERY YEAR, just like clockwork as the rise of the third world continues apace.

    Oil was roughly the same PRICE from 2010 into 2014, and the global economy continued to grow (global GDP) just fine.

    You can’t just make stuff up, pretend like micro-econ 101 doesn’t exist, and expect to be credibile.

  13. Outcast_Searcher on Sun, 5th Mar 2017 11:06 am 

    The priced crashed due to the glut. The article did correctly show that there is a supply gut. This is completely normal behavior for commodities and has been for as long as there are written records.

    Supply/demand is “a thing” and the price will be determined by BOTH of these things over time, as usual.

    When you see the amount of oil CONSUMED globally start to shrink meaningfully year after year, THEN you can credibly say oil demand is falling.

    At that point the question will be is it because “people can’t afford it” or is it because they don’t WANT/NEED it due to something better (the better EV’s and PHEV’s that are apparently on the way in large numbers within a decade or two.

    Interpreting everything through “the lens of short term doom” has been wrong year after year after year. Why don’t hard crash short term doomers ever learn?

    I don’t think BAU growth is sustainable long term, and I think AGW is the biggest medium term symptom of that, currently. However, I do recognize that data does matter.

  14. rockman on Sun, 5th Mar 2017 12:35 pm 

    Looker – “…the Oil companies need to gamble on prices rising because they need revenue desperately to maintain their reserves, pay bills…” OK, let’s go with that logic and pretend you run one of those companies. 1) Why would you spend money (that you are ready short on)to lift oil you’re not selling? 2)Why would you pay some one to haul oil that you’re not selling from your lease to a storage facility like Cushing, OK? You do understand that moving oil from Point A to Point B isn’t done for free, right? 3} Why would you pay someone to store oil somewhere, like Cushing OK., when you could keep the same bbls of oil in your reservoir for free? After all if you’re waiting for oil prices to increase all you need do is start producing your wells at their max rate. So you get the same revenue from your oil sales without all the expense storing it.

    So again, who would buy oil when prices or low and then pay to have it stored waiting for oil prices to increase and sell that oil for more then they paid for it + what the spent to store it?

    BTW, this really isn’t a trick question. Think “contango”. And did you notice that amount of oil going into storage (above the normal working volume” seems rather coincidental to lower oil prices. Remember one of the concept of making money in the market place: buy low…sell high? LOL .

  15. rockman on Sun, 5th Mar 2017 12:49 pm 

    Looker – “The priced crashed due to the glut”, Or is the glut due to the price crash? After all as prices crashed global oil production reached all time record highs, right? And if OPEC is successful in its efforts to increase oil prices you would expect consumption to decrease, right? And if consumption declines below supply capability isn’t that the definition of a “glut”: supply volume exceeding demand? Thus higher oil prices and lower consumption would define a glut. Thus lower prices and higher consumption would represent an “unglut”, right? LOL.

  16. Mark on Sun, 5th Mar 2017 1:15 pm 

    Perhaps the customers are getting too poor to afford the stuff? World GDP growth excluding China is basically stalled out.
    Most average people having trouble making ends meet here in US. just look at the collapsing retail business….no rocket science needed here.

  17. BobInget on Sun, 5th Mar 2017 2:41 pm 

    China is saying growth is stalling out around 6.5%
    because of global downturn. (not a drop in oil consumption)

    Nothing is being said about imminent 100 M Bp/d WW crude consumption or India’s 9.5% growth rate. India
    will require an EXTRA one million barrels p/d in 2017/18. South Korea, Vietnam will also be importing additional crude.

    President Trump is asking for a trillion dollar infrastructure rehab.
    No one questions where oil will come from if indeed the US is willing to take on another trillion $ in red ink.
    (Russia?)

    Because there’s no actual unemployment problem.
    Because we are determined to exile 20 million mostly blue-collar workers.
    Only much higher wages will attract enough red blooded Americans working day and night, fencing off Mexico.

    With no further wars, using only documented labor,
    wage inflation is simply a fact of nature.

  18. peakyeast on Sun, 5th Mar 2017 3:06 pm 

    Money is a human construct and is subject to 100% human interpretation and manipulation of value.

    Eventually the manipulation of the monetary systems will not be able to massage and distribute the decline in natural wealth away to some poor sods with no power. It will be become evident to everybody there is a huuge problem.

    Then the newly developed and massive investments in anti-riot equipment and mass surveillance will shows its true value…

  19. tita on Mon, 6th Mar 2017 5:56 am 

    1. The inventories ceased to build in 2016. They were building between 2014 to 2016.
    2. The global demand increased in the same rythm than previous years, around 1mbpd. 2015 show almost 2mbpd increase, and 2016 1.6
    3. It’s true that 2010-2014 prices had an effect on demand, which is part of the glut.

    We are in 2017, not 2014.

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