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The US Over-Supply Of Oil Is Ending

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The U.S. over-supply of oil is ending.

Comparative inventory (C.I.) has been dramatically reduced in 2017. Levels have fallen 159 mmb since February and are now approaching the 5-year average for the first time in nearly 3 years (Figure 1).

Figure 1. The U.S. Over-Supply of Oil is Ending. Source: EIA and Labyrinth Consulting Services, Inc.

An interpreted yield curve that correlates C.I. and WTI price is developed by cross plotting the same data without the time dimension (Figure 2). The yield curve may provide price solutions to inventory reduction assumptions in the near term.

Figure 2. Crude + Product Comparative Inventory Have Fallen 159 mmb in 2017. C.I. Could Reach the 5-Yr Avg By & $70 WTI Prices by Early 2018. Source: EIA and Labyrinth Consulting Services, Inc.

Accordingly, if C.I. continues to fall at the 9-month average of 4 mmb/week, oil prices may be approximately $67 per barrel by the end of December. If C.I. falls at the 8 mmb/week average since late September, WTI could approach levels not seen since before the price collapse in late 2014.

Exports and The Brent-WTI Spread

The causes of the U.S. inventory drawdown are clear: increased exports of crude oil and greater domestic consumption.

Crude oil exports for the first half of 2017 averaged 766 mmb/d but rose to 1.8 mmb/d in September and October. Increased exports now average more than 12 mmb/week and contribute substantially to reduced inventory levels.

Higher export levels correlate with the increased spread between Brent and WTI prices that began in late July (Figure 3). Traders can sell U.S. crude oil overseas at less than international prices but at levels higher than domestic pricing allows. Record exports of 2.13 mmb/d occurred during the week ending October 27.

Figure 3. U.S. Crude Oil Exports Reached Record 2.13 mmb/d Week Ending Oct. 27. Higher Export Volumes Correlate With Increased Brent-WTI Price Spread. Source: EIA and Labyrinth Consulting Services, Inc.

Tight oil production levels, crude oil quality and U.S. refinery blending needs are behind the WTI discount to Brent price. Most U.S. refineries are designed for international grades of oil like Brent which is heavier and contains more sulfur than WTI.

The U.S. has had a surplus of light sweet oil since the tight oil boom began, and the Brent-WTI spread reached almost $30/barrel in September 2011 as a result (Figure 4).

Figure 4. Brent-WTI Price Spread Related to Surplus Tight Oil Production. Source: EIA and Labyrinth Consulting Services, Inc.

The spread decreased to about $2.25 with the advent of rail shipments of WTI to East Coast refineries, and associated reduced light oil imports. The transport cost was reasonable when oil prices were $100 per barrel but lower oil prices after 2014 resulted in a progressive decline in rail shipments (Figure 5). East Coast refiners increasingly relied again on imported light oil mostly from West Africa to blend with heavier grades of oil.

Figure 5. Recent Increase in Brent-WTI Spread Related to Replacement of WTI Rail Shipments to East Coast Refineries by West African Light Oil Imports. Source: EIA and Labyrinth Consulting Services, Inc.

A surplus of tight oil returned as production recovered as a result higher oil prices in 2016 and 2017. Surplus supply caused discounted WTI prices, and the recent increase in the Brent-WTI spread. Some of excess oil has been exported in recent weeks but the price spread persists because import levels are so far unaffected.


The second major cause of the U.S. inventory drawdown is increased domestic consumption of refined products.

Consumption reached a 10-year record of 21 mmb/d during the summer of 2017 (Figure 6).  August 2017 consumption was 300 kb/d more than in August 2016 and that difference accounts for more than 2 mmb/week of incremental inventory reduction. In fact, the increase in consumption that began in January coincided with the beginning of comparative inventory reduction that in February (red dots in Figure 6).

Figure 6. Record 21 mmb/d Refined Product Consumption in Summer 2017 A Major Factor in Comparative Inventory Reduction. Source: EIA and Labyrinth Consulting Services, Inc.

The greatest portion of consumption is from transportation. The declining growth rate of vehicle miles traveled (VMT) that began in early 2016 reversed in the second quarter of 2017 despite somewhat higher gasoline prices (Figure 7).

Figure 7. Declining Growth Rate of Vehicle Miles Traveled Reversed in Q2 2017 Despite Higher Gasoline Price. Source: U.S. Federal Reserve Bank, EIA and Labyrinth Consulting Services, Inc.

VMT data is only available through July but it is likely that growth continued at least through August based on consumption data that is more current.

The Possible Downside of Consumption

It is reasonable to question the capacity of the rest of the world to continue to absorb U.S. exports. Exports have increased in each of the last 6 weeks except the week ending October 6, and exports that week were still a robust 1.3 mmb/d. It is impossible to get reliable inventory data for most of the rest of the world but OECD data suggests inventory reductions similar to those described in the U.S.

Continued high U.S. consumption is the only area of concern for sustained higher oil prices. September and October consumption were considerably lower than in August. It is normal for consumption to decline after the summer driving season but the magnitude of the decline is disturbing.

October consumption was 1.2 mmb/d (38 mmb/month) less than in August (Figure 8). That is almost as much as the total August-to-January seasonal decline during the previous year (1.4 mmb/d, 42 mmb/month).

Figure 8. October U.S. Consumption Was 1.2 mmb/d (-38 mmb) Less Than Than In August, Almost As Much As Total August-January Seasonal Fall in 2016. Source: EIA and Labyrinth Consulting Services, Inc.

The data may be biased by the effects of hurricanes Harvey and Irma, and two months do not define a trend. It is, nevertheless, a troubling observation despite the fact that it will probably not affect inventory levels or oil prices in the rest of 2017.

Consumption becomes a greater concern if oil prices increase as much as I expect because gasoline prices will increase accordingly–consumption and gasoline price are negatively related (Figure 9). Higher oil price means higher gasoline price and lower consumption.

Figure 9. U.S. Consumption is Inversely Related to Gasoline Price. Higher Oil Price Means Higher Gasoline Price & Lower Consumption. Source: U.S. Federal Reserve Bank, EIA & Labyrinth Consulting Services, Inc.

$70 WTI will result in almost a $1/gallon price increase above the current average retail price of $2.53 and that may depress consumption.

The U.S. Over-Supply of Oil Is Ending

Increased exports of crude oil have reduced U.S. inventories more quickly than I expected a month ago when I wrote Higher Oil Prices Likely in Early 2018. Higher consumption levels were well established at that time but evidence for a trend of elevated export levels consisted of two anomalous data points.

Because of the way that trades are arranged, if the Brent-WTI spread closed tomorrow, continued high export levels are almost inevitable through the end of the year. That means that oil prices will increase at least for the near term.

Comparative inventory is not a predictive methodology.  It is, however,  a powerful tool because it identifies trends that correlate inventory change and oil price. As such, it can provide price solutions to inventory reduction scenarios. Those scenarios suggest that WTI prices in the $60 to $70 range are almost certain in early 2018, and that prices higher than $70 are also possible.

The U.S. over-supply of oil is ending. It is likely that comparative inventory will be near or even below the 5-year average by the end of 2017 or early in 2018. Higher oil prices may be good for oil companies but bad for consumers.

For the first time since the 2008 financial crisis, the U.S. and global economy appear to have some reasonable potential for growth. Economists are generally too preoccupied with monetary policy, interest rates and abstract mathematical models to see the obvious connection between the price of oil, our master resource, and economic growth.

Will higher oil prices smother the weak flicker of economic growth that now seems possible?

Higher prices will unquestionably provoke a new flood of capital to E&P companies. Although demand is important, producer behavior and the impulse for over-production have been the defining aspects of the last decade in the oil industry. Under-investment and limited availability of frack crews have modulated supply since early 2015. That will change probably later in 2018.

The path to price recovery will not be straight. The elegant interplay between higher oil prices, credit and the impending threats of over-supply and under-supply will continue.  In the medium term, we will learn whether tight oil plays in fact have sufficient reserve potential to meet global supply needs. My guess is that they do not.

That means reliance on more costly deep-water projects that have much longer development time lines. Associated reserves are largely know and, while considerable, are insufficient for more than about a decade of demand.

Supply and its alter-ego credit are central to mapping the implications of the topics I have discussed here. Most investors and analysts assume—perhaps unconsciously—that future supply will be more abundant than present supply. What if they are wrong?

**Help from J.M Bodell and Matt Smith are gratefully acknowledged.


Art Berman


10 Comments on "The US Over-Supply Of Oil Is Ending"

  1. dave thompson on Tue, 7th Nov 2017 8:20 am 

    “The U.S. Over-Supply of Oil Is Ending” Oh boy great news for all us “doomers”, now when the price of oil skyrockets out of control and crashes the world economy for the last time, the fun begins.

  2. rockman on Tue, 7th Nov 2017 9:08 am 

    “Most U.S. refineries are designed for international grades of oil like Brent which is heavier and contains more sulfur than WTI.” No, they aren’t. They are designed to process oil in a very narrow range around 32° API. Our increased production of light oil/condensate has allowed US refineries to import less. And that increased production on a global scale allowed more of the heavier oils to be refined. Increased consumption of products increased demand for heavier oils to blend with the light oils/condensate. It hasn’t been an increase in just the WTI/Brent spread: all global production of light oil/condensate is selling at a discount compared to the heavies.

    Simple supply/demand dynamics.

  3. Davy on Tue, 7th Nov 2017 9:14 am 

    “OPEC Now Says U.S. Shale Will Grow Even Faster Than They Previously Thought”

    “North American shale output will soar to 7.5 million barrels a day in 2021, the Organization of Petroleum Exporting Countries said in its World Oil Outlook report on Tuesday. That’s 56 percent higher than it forecast a year ago. The revised outlook illustrates OPEC’s dilemma: with supply curbs also helping its rivals, demand for the group’s crude will remain little changed until shale oil output peaks after 2025. U.S. shale oil “most strikingly” exceeds previous expectations after showing the “resilience and ability to bounce back,” OPEC said. “This growth is heavily front-loaded, as drillers seek out and aggressively produce barrels from sweet spots in the Permian and other basins.”

  4. Anonymous on Tue, 7th Nov 2017 10:35 am 

    What a mess. I always knew Berman was a kook but I didn’t think he was ignorant of basics like Brent NOT being a heavy crude. Brent and WTI are very, very similar. Both light sweet crudes. Compared to WTI, Brent is SLIGHTLY heavier. This, Berman has confused to thinking Brent is a heavy crude. What a dumb shit.

    See this link for simple graphic of some different crude slates and their API gravity (higher is lighter) and sour/sweetness (low sulfur is sweet).

    Look at the chart! Look how close WTI and Brent are. Like peas in a pod.

  5. Anonymous on Tue, 7th Nov 2017 10:37 am 

    The article is easier to read and parse than a Rune article (thank God) but still has some aspects of the mess. Figure 2 in particular is a crazy chart.

  6. Anonymous on Tue, 7th Nov 2017 10:45 am 

    It is not the Brent to WTI Cushing differential that drives the export decision. It is the Brent to LLS (or WTI Houston) differential. Quite a few people don’t realize that there is a significant spread that has broken out between Cushing and the Gulf Coast.

    Berman also does not understand the major reason why Bakken trains are no longer heading to Atlantic refineries. DAPL.

  7. Anonymous on Tue, 7th Nov 2017 10:49 am 

    Berman also confounds US consumption of crude by REFINERIES with US consumption of petroleum products. Both are up, but they are not the same thing or the same amount up. We are actually exporting more petroleum products. We may not be energy independent in oil, but we sure are in refining!

  8. Anonymous on Tue, 7th Nov 2017 11:36 am 

    Rock, heavy crude is not more valuable than light crude. The difference has shrunk recently but world prices are still higher for light grades of crude than for heavy grades. See the tables at the bottom of this article:

    The table in this article gives API gravity and sulfur content for the Arab crude slates:

    (Arab extra light has similar API gravity, 39, to WTI or Brent but is noticeably sourer. Thus trades at a slight discount at the refinery gate, landed cost.

    Arab super light is 50 API and minimal sulfur. Like a condensate. Trades into Asia only, but interestingly still at a premium to WTI. Asia still LOVES condensate. (Used to be this way in the US and rest of World, but has shifted since the LTO boom.)

  9. James Tipper on Tue, 7th Nov 2017 12:42 pm 

    I believe this uptrend the last few months will continue until we hit the peak. Unlike 2008, there will not even be some semblance of a “recovery” afterwards. We will peak in the next few years, I’m sensing it.

    All the countries that have peaked already in the world combined with ever-increasing demand for oil will lead to the end. Oil will most likely go up in price to until no one can afford it anymore. And then, pop.

  10. Anonymous on Tue, 7th Nov 2017 2:51 pm 

    EIA has a great discussion of the price differentials on pages 4 to 5 (numbered pages, not pdf pages) of the attest STEO. See in particular figure 2, which shows the LLS to Brent.

    Much better explanation than Art Berman. Berman says he is smarter and shrewder than EIA, but when problems noted in his analysis, defends himself as needing to dumb it down for his audience.

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