FINANCIAL ICEBERG
Always consider hidden risks
 CHARTS
To Drown in OIL
( From Ecointersect , EIA, EconMatters, Science Monitor, Haver, Motley Fool  )​
US consumption is trending down because of the slow economy and energy efficiency.
( Read US Mileage Oct 25 )


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The strong growth in U.S. crude oil production, primarily attributable to growing volumes of crude oil produced from tight oil formations, has been a major oil market story in recent years. The U.S. Energy Information Administration (EIA) estimates that U.S. total crude oil production averaged 6.4 million barrels per day (bbl/d) in 2012, the highest annual average rate of production since 1997, and an 0.8-million-bbl/d increase from 2011 (See Figure 1 below). This month, EIA is extending the Short-Term Energy Outlook (STEO), forecast period through 2014 for the first time. In this forecast, EIA expects continuing strong growth, with U.S. crude oil production increasing to 7.3 million bbl/d in 2013 and 7.9 million bbl/d in 2014, the highest annual rate of crude oil production since 1988.

These continuing increases in crude oil production are having profound effects on U.S. petroleum balances. A large portion of tight oil production consists of light, sweet crude oil. As previously noted by EIA, growing production has led to reduced imports of light, sweet crude oil on the U.S. Gulf Coast, the leading U.S. refining center. Without sufficient pipeline capacity to move all of the growing midcontinent production to the Gulf Coast, prices of these crudes, such as West Texas Intermediate (WTI), have declined compared to coastal grades such as Louisiana Light Sweet (LLS), reflecting the increased cost of moving the crude using marginal modes of transportation such as rail, barge, and truck. The persistent discounts have spurred many infrastructure changes, including the May 2012 reversal of the Seaway Pipeline, which runs between Cushing, Oklahoma and Houston, Texas. The availability of domestic light crude to U.S. Gulf Coast refineries is expected to continue increasing as pipeline expansions allow more crude oil to move to the U.S. Gulf Coast, including an expansion of the Seaway Pipeline expected to be completed later this month. Growing production is also encouraging crude oil movements to the East and West coasts via rail.

Finally, the choice of accounting convention for measuring liquids production also affects reported output levels. Domestic field production of crude oil and liquefied petroleum gases, a somewhat broader focus than crude oil alone, totaled 8.5 million bbl/d in 2012, and is forecast to reach 9.5 million bbl/d in 2013 and 10.1 million bbl/d in 2014. Forecast production in 2014 represents the highest level of total field production for all liquids since 1985. ( See graph below )
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​​The problem here is that U.S. and Canadian oil production is increasing faster and producing more oil than Cushing can build extra storage or increase pipeline capacity, and or bring new pipeline projects online from Cushing to Houston. Oil stored at Cushing basically jumped from 30 million barrels to 50 million barrels in 2012, an increase of 20 million barrels which is just an incredible feat, just imagine if there were no pipelines pumping oil to Houston in 2012. In fact, full capacity including shell capacity would have been completely filled to the gills, and Cushing would have to stop accepting oil into its facilities.( See graph below )
There can be a major pullback in oil prices, we are presently already in the deflationary stage, but you haven`t seen anything yet, because we are increasing production (we currently produce more than we consume each day) around the world as prices are real high relative to demand. What happens when the central bank stimulus stops being effective, and it stops altogether, and the debt issues are finally addressed? That is when the real recession takes hold, and the only solution then to massive oversupply is stopping production. The real question is who stops production: is it North America, Russia or OPEC? The real answer in the boom and bust cycles that play out in oil industry is all of the above, in the end everyone is going to have to cut back production as prices are going to drop like a rock in the next bear cycle in the oil industry.
The weekly EIA report came last week and one of the noteworthy data points was the Cushing, Oklahoma storage numbers. Already at a record, Cushing added another 1.8 million barrels to storage sending total Cushing stocks to 51.4 million barrels of oil in storage facilities at the energy hub.

There has been 6.3 million barrels of oil added to Cushing during the last 6 weeks. To put these build numbers into perspective, Cushing oil inventories stood at 28.3 million barrels for this time a year ago, which is a build of 23.6 million barrels in a year.

​​Yet we have almost doubled Cushing`s inventories in a year. This points to a much bigger problem with analysts missing entirely, thinking this was just a Cushing log jam problem. This is seeing the trees, and missing the overall forest, Cushing is just a reflection of the bigger problem, there is just too damn much oil sloshing around the world right now with nowhere to go.

​​The real problem is that nobody ever planned for the US to be producing 7 million barrels of oil every day and rising, there is just not enough demand in the world for this extra oil, so it has to be stored because everyone needs the money these days. And until prices drop substantially, no one is going to cut back producing this black gold.



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US  and World Demand

Global Crude Oil and Liquid Fuels Overview

EIA expects oil markets to loosen in 2013 and 2014 as increasing global supply more than offsets higher global consumption. Projected world supply increases by 1.0 million bbl/d in 2013 and 1.7 million bbl/d in 2014, with most of the growth coming from outside the Organization of the Petroleum Exporting Countries (OPEC). North America will account for much of this growth. Projected world liquid fuels consumption grows by an annual average of 0.9 million barrels per day (bbl/d) in 2013 and 1.3 million bbl/d in 2014. Countries outside the Organization for Economic Cooperation and Development (OECD) drive expected consumption growth.

​​Global Crude Oil and Liquid Fuels Consumption

World liquid fuels consumption grew by an estimated 0.9 million bbl/d in 2012 to reach 89.2 million bbl/d. EIA expects that this growth will remain about the same over the next year before picking up again in 2014 due to a moderate recovery in global economic growth; consumption reaches 90.1 million bbl/d in 2013 and 91.5 million bbl/d in 2014. Non-OECD Asia is the leading regional contributor to expected global consumption growth.

OECD liquid fuels consumption declined by 0.4 million bbl/d in 2012. EIA projects OECD consumption to further decline by 0.3 million bbl/d in 2013, as modest consumption growth in North America is more than offset by decreasing consumption in Europe. The OECD consumption decline narrows to 0.1 million bbl/d in 2014 as European consumption begins to flatten in response to higher economic growth. EIA projections do not assume any significant deterioration of the economic situation in the United States or the European Union (EU) next year.

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Oil Glut at Cushing Storage Facility

​​The final EIA Inventory report for 2012 : Cushing inventories increased another 4.39 million barrels to a record 51.36 million. All this build in Cushing happened even as the Seaway pipeline began pumping crude from Cushing, Oklahoma to a major U.S. refining hub in Houston, Texas in May of 2012.  ( See graph below )
Total Crude Oil and Petroleum Products
US Consumption​
Us Inventories

​​U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.6 million barrels from the previous week. At 371.7 million barrels, U.S. crude oil inventories are well above the upper limit of the average range for this time of year.
( See graph below )​
US Production

​​​​The Rise in Domestic Pro​duction

​U.S. crude oil production (including lease condensate) averaged almost 6.5 million barrels per day in September 2012, the highest volume in nearly 15 years. The last time the United States produced 6.5 million barrels per day or more of crude oil was in January 1998. Since September 2011, U.S. production has increased by more than 900,000 barrels per day. ( See graph below )
​​A New Era: Growing Economy with Lower Energy Prices ?

In fact, more supply than demand, even with a robust economy, because part of the reason the world economy will be doing so well is all the global enterprises out there producing oil. It’s a good business with very high margins when compared to many other industries with the past decade of higher prices.

Consequently, even if the US economy really takes off in 2013 as some have forecasted, don`t look for demand to overtake supply in the equation. The domestic oil renaissance means that we could have a booming economy, and still have more supply than we can use each day. Thus it is actually possible to have an era with a great economy, and even lower oil prices due to the domestic oil boom.
Consequences

Lower OIL Imports​​

US oil imports at lowest level since 1999 as trade gap shrinks

​​The oil and gas picture is improving. The trade deficit for petroleum-based goods alone shrank from $326 billion in 2011 to about $291 billion last year. That’s still a big deficit, but oil imports fell by about $24 billion. Meanwhile, petroleum-related exports rose by more than $10 billion. According to analysis of the data by IHS Global Insight, an international consulting group, oil imports in December hit their lowest level since December 1999.

​In the four weeks ended Jan. 18, the U.S. imported less oil than we've imported in any period since the year 2000, a level we haven't seen consistently since 1996. It's a product of increased oil drilling across the U.S., and there's a demand aspect as well. Even as the economy has improved over the past three years, the amount of oil supplied to U.S. consumers has fallen.

Over the next decade, it's possible that increased drilling, efficiency, and alternatives could render us almost import-free in the oil market. It's not as crazy as it once appeared.

Leading the decline in imports was an 11.0% drop (-20.9% y/y) in the value of petroleum imports. The quantity of petroleum product imports was off 7.2% m/m and it was down 17.5% y/y. ( See graphs below )
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Efficiencies

Efficiency becomes reality

Oil drilling gets a lot of the credit for the declining imports, but declining demand should get equal play. According to the U.S. Energy Information Administration, petroleum product supplied in the first 11 months of 2012 averaged 18.639 million barrels per day, 10.4% lower than 2005. Part of this drop is due to the recession that we're still recovering from, but efficiency is playing a bigger role than many people think.

Usage has dropped since 2010 despite growing GDP, and fuel efficiency standards are playing a role. The Obama administration passed a new CAFE standard of 54.5 mpg for auto manufacturers that takes effect in 2025. This is driving long-term planning, but the reason for better efficiency may be closer to the pump.


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