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[mick]

#3/ Mr. Market Or Mother Nature, Who Rocks Oil First?
http://seekingalpha.com/article/4025391-mr-market-mother-nature-rocks-oil-first
Nov. 22, 2016 5:16 AM ET|10 comments | About:
The United States Oil ETF, LP (USO),
OIL, UWTI, UCO, DWTI, SCO, BNO, DBO,
DTO, USL, DNO, OLO, SZO, OLEM, OILK, OILX

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An article in the Globe and Mail this past February highlights the increased interest in floating storage by Oil Traders.

Yes a lot of floating storage is because of excess supply but a lot is also from Oil traders taking advantage of the high contango. This Oil is already sold in the market so is really not excess supply.

Therefore a considerable amount of storage is because of the price contango and not just over supply.

The EIA's phantom oil storage

Perhaps the strangest event is the big distortion or adjustments with the EIA's oil storage numbers. The market is focused on what you see on this chart, notably the increase from about 340 million barrels the end of 2014 to over 500 million

The EIA, determines changes to the amount of oil in storage with a pretty straight forward calculation.

Stock Change = Domestic Production + Net Imports - Crude Oil Input to Refineries

However the data never matches up accurately with the data from underground and tanker storage, the EIA assumes the problem comes from the less accurate production, import, or refinery data, and "adjusts" the numbers accordingly. In the past, this adjustment has been minimal around 10% to 15% so can be safely ignored.

But over the last several years, the differences have often represented as much as 60% and more of the total number and has really widened more so since 2014.

At least on paper, there's a lot of oil in U.S. storage - but as this chart shows in July more than 400 million barrels- that doesn't appear to come from either domestic production or from imports.

This is a lot of phantom oil derived from EIA adjustments. It would be hard to imagine that 400 million barrels are really not there in storage, but I bet the real storage may be closer to the 300 - 350 million barrel number than most believe.

Another point of interest is storage utilization. It was pretty steady around or just over 60% until the end of 2014, then it moved up to 70% or just over. This is roughly only a 10% increase in utilization and is considering the EIA's phantom storage. If we were so much awash in oil would not this be higher?


Summary

What if oil storage is far less than the markets believe?

And at the same time production feel significantly because of less drilling.

It would mean the market could come back to balance very quickly.

We know that Saudi Arabia has a policy to maintain a spare output capacity between 1.5 to 2 million barrels and is currently pumping oil at a rate near a 32 year high. There is not much increase left in Saudi output.

I pointed out in my Oct 24th Gold and Oil update how drilling rigs have plummeted around the world - outside the middle east and this will lead to lower production.

This has already begun and the production decline will pick up speed.

The latest EIA weekly report shows that U.S production is already down - 6.1% from a year ago.

China's oil output dropped 11.3% from the same time a year ago to 16.1 million tons, according to the National Bureau of Statistics. The daily average was 3.8 MMBOPD, the lowest since May 2009, and down from 3.9 MMBOPD in September.

In Norway average production in September was: 1,375,000 barrels of oil, about 11% below the oil production in September last year.

Offshore Oil production now counts for 30% of total production and it is about to take a big hit. Infill drilling is used to arrest the natural decline in an offshore oil field.

This chart shows the decline in infill drilling due to previous drops in the price of oil. The data is from the Gulf of Mexico, Southeast Asia and Brazil. The decline in infill drilling in 2009 was the largest… until now. The first half of 2015 saw the largest decline in offshore infill drilling in history.

Based on this trend, Rystad Energy estimates that global offshore oil production in mature field will decline next year by 1.5 million barrels per day (bpd), or 10 percent, to 13.5 million bpd from 15 million bpd in 2015.

The UK North Sea may fare worse with the collapse of investment in new projects. Oil&Gas UK reports that this year the upstream industry is expected to approve less than £1 billion to spend on new projects, compared to a typical £8 billion per year in the last five years - sparking fears for the long term future of the industry.

If there is no demand shock to the market, the supply erosion from less drilling will bring the market back to balance in the next year and perhaps even amount to a supply deficit. Especially if storage levels are not what we are led to believe.