Blue Point Trading Market View – January 10, 2014
Oil tanking on an oil glut? The United States’ average daily oil production is on track to surge by 1 million barrels per day this year, the biggest one-year jump in the nation’s history, according to federal data. The country has pumped an average of 7.5 million barrels of crude per day in 2013, up from 6.5 million barrels per day in 2012. That broke last year’s record, when oil production jumped by 837,000 barrels per day between 2011 and 2012.
The U.S. Energy Information Administration (EIA) projects that oil production will jump by another 1 million barrels per day in 2014, largely buoyed by drilling activity in Texas’ Eagle Ford Shale and Permian Basin regions, as well as North Dakota’s Bakken Shale. The Gulf of Mexico also is seeing a boost, with oil production expected to grow to 1.4 million barrels per day in 2014, up by 100,000 barrels. The data is evidence of the astonishingly rapid turnaround in the nation’s energy story.
Total U.S. Energy consumption will grow by just 12 percent between 2012 and 2040. But consumption of petroleum-based liquid fuels will fall during that time span as a result of greater vehicle efficiency. Energy use by cars and light trucks will decline sharply. Vehicle efficiency improvements will more than make up for the slight climb in overall miles traveled in these light-duty vehicles. Light duty vehicle energy consumption is set to decline 25 percent between 2012 and 2014.
This all sounds pretty bearish for Oil, especially the WTI contract. We have seen this in the recent nose dive of this Oil contract. But to counter balance this argument is twofold. First global growth is still grinding on and Oil is somewhat fungible. Slower US demand will be offset by rising global demand. The estimate of global oil demand for 2013 has been revised up by 130 kb/d, to 91.2 mb/d, on stronger-than-expected 3Q2013 OECD demand growth of 320 kb/d. Global demand is now seen advancing by 1.2 mb/d in both 2013 and 2014, to reach 92.4 mb/d in 2014.
Secondly, the other part of the supply equation is that the current Oil being found, costs considerably more to get out of the ground. In addition, geopolitics are placing current Oil production locales at ever increasing risk. Some Oil analyst has been calling for the demise of Oil, even to go below $80 a barrel. If this should happen, it could be a disaster for many Oil investments. My thinking is that the Oil producing Cartels will keep Oil prices between the $85 to $110 price levels, barring any sudden turn in the economy or geopolitical Oil supply disruption shock. A bit of a wide range trade.
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