Oil Glut: IT’S THE DEMAND, STUPID!

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Published on The Doomstead Diner on March 5, 2017

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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

16 Responses to Oil Glut: IT’S THE DEMAND, STUPID!

  • St. t says:

    Good post RE.  

  • St. Roy says:

    Good post RE. To really understand oil and money in the economy, I think we need to be talking about BTUs. The net energy available to society is all that keeps it going and there ain’t much of it left.

  • Rob W says:

    Any thoughts on the new 'compressed triangle of doom' which seems to have formed over the last year or so?

  • RobM says:

    The record inventory might lead people to think we've got years of supply saved for a rainy day.

    520 million barrels is less than 6 days supply. That's not so much rain.

    • RE says:

      That is basically irrelevant.  If they run out of storage space, everybody has to shut in production.  You can’t shut in a well and start it again on a dime, you know.  Both processes take time. A week of time with no revenue and every OPEC country is FUCKED.

      RE

    • Northwest Resident says:

      520 million barrels is less than 6 days supply — assuming BAU.  But if happing motoring was suddenly shut down worldwide, worthless widget factories stopped operations, and ONLY essential oil-related activies were allowed to continue, then that 520 million barrels would go a whole lot further.  Pure speculation of course, but it may be that this one last big "glut" in storage is all part of "the plan" for that historical moment when TSHTF.

  • Mister Roboto says:

    Well, I guess that explains how the WTI price of oil has been able to just sit there at about (not even) $55 a barrel for more than a year. I do have this sense that something big is about to go down, like the whole world is holding its breath waiting for the other shoe to drop. Perhaps this will be that other shoe.

  • Skip says:

    A while back I read a Dmitry Orlov article where he stated that the collapse of the Soviet Union was due primarily to a sudden drop in oil prices.  Then, the other day, I listened to an Ellen Brown interview on Greg Hunter's USA Watchdog show.  She had a theory about the more recent oil price collapse that sounds solid to me, given all the Russia hysteria being pushed nonstop by the corporate media.  She thought that the price collapse was due to the neocons trying to bring Russia down by getting Saudi Arabia to over pump.  This time around, John Kerry visited SA a few weeks before the price collapse started.

    I think the neocons are totally capable of doing this after watching an insane interview of Richard Pearle, one of Reagan’s neocon advisors back in the 80s.  He proposed a total takeover of the USSR with nothing more than a fleet of aircraft carriers that would sail over to their north shore.  I bet he thought it would be a “cake walk.”

  • Tony says:

    Oh, I'm convinced that official statistics are lying. You've pointed out falling demand, though it is more likely to be static, I think. We're also getting estimates of near static CO2 emissions, when it's said that this is despite growth. I call BS on that. You don't get that much efficiency so quickly. If anthropogenic emissions are barely increasing, then it's more likely that the global economy is barely growing, but it is probably just about growing (though at rates that feel like contraction). Debt must also be growing if economies can't grow quicly enough to service existing debt.

    So, I probably agree with you, RE. Only time will tell, of course.

  • Karl Brantz says:

    When – not if – the next war starts, could it be that oil and other commodity prices will increase dramatically as the players compete to secure the needed fuel supplies in advance of the competition? If so, long positions or options on those tankers and storage facilities would appeal to the risk takers. If they have read any history, they'd conclude that the world war is overdue. However, if the nukes start flying, then  the roulette table will no longer function according to historical principles. If I was a betting person, I'd be making those trades from one of the "Guays" either Uru or Para. It will take a bit longer for the fallout to reach that area, allowing for a bit more high living before the "winter."

    • Magstar Wilkerson says:

      I agree, Karl. Mankind's made up economic rules always end up putting us in a corner with one economic factor or another reaching a point of a predicament we can't get out of or should i call it a triangle of doom. We are smack dab in the middle of a huge economic predicament that has only been stretched out a little longer due to the capability to borrow trillions on steroids (in the false hope of making it back later). It seems like end game, end of BAU times, which points to war. We have to fight a world war to reset everything to begin another period of economic development. Besides all that fallout drifting in the atmosphere blocking or should i say dimming sunlight, will be exactly what we need to counter GW that is ramping up. Get your freeze dried food and water supplies in order for the bright flashes.

      • RE says:

        A war won’t “reset everything to begin another period of economic development” this time.  The energy isn’t there to do the rebuild, especially considering said war likely goes Nuclear and the rubble left over will be a lot worse than Europe after WWII and global as well.  Plus no Caterpillar Back Hoes and Daiwoo Front End Loaders to clean it up with either.  How long do you think it takes to clean up that mess for the few remaining people with pick axes and shovels?

        All a war does this time is accelerate the spin down to stone knives & bearskins.

        RE

  • InAlaska says:

    It might be time to buy stock in tank farm companies and the welders and steel tank manufacturers.

  • It's said about gold, people dig it out of the ground just to turn around and bury it. Right now there is something similar taking place in the world of crude: it is taken out of storage (underground) just to be put back into storage somewhere, maybe a boat off the coast of Rotterdam. You can look at this as the worth of oil being greater in storage than it would be used in a bunch of cars (where it really IS worthless). At some point the oil is left alone for this reason = worth more in the ground than it is to the drillers as it becomes a big loser to the drilling industry.

    All any economy does is allow measuring of relative worth. Usually, 'commerce' is worth more than money so people 'sell' the money for commerce and are happy to do so. These kinds of relationships are not set in cement, things change and the effect is whiplash. Best to hold the oil in the ground; at least we will know where it is!

    Of course the big, unmentionable problem is the absence of return on the use of 90% of the oil that is extracted. No return and what pays is debt; sadly, the credit machine is broken. Partly because the amount of credit in total represents a unity. What that means is the amount of credit at any instant represents available purchasing power. That unity is equal to another unity: the capital which is available to purchase. As we burn through our capital we are also burning through our purchasing power. Over time, the loss of purchasing power makes it difficult to extract more capital which in turn diminishes purchasing power in a vicious, self-amplifying cycle.

    It's hard to say what would happen if/when the drillers went on strike all at once. The price might jump a bit after awhile but later the current dynamic would reassert itself with an apparent (relative) glut. A short strike would have no affect, a longer strike would pauperize more customers remove more support for the price. A fire sale would last until the inventory declines but any rise would have the drillers extracting more fast as possible setting up the current dynamic again. Of course, some other 'Third Thing' might take place such as a credit crisis or some stupid decree that would rock the boat to the point where it can't recover. Bottom line is the oil industry has been insolvent for awhile, it's customers are broke and there is nothing to do about it.

    • RE says:

      I’m interested to see what happens when the drillers HAVE to shut in production, simply because they have run out of room to store more oil above ground.  Who will blink first?

      RE

  • Some jokester in the vast peak oil message board once quipped,

    "given enough demand destruction, Lo! the USA becomes Energy Independent at last!"

    obviously it's a silly remark because if demand destruction took out 8 million barrel a day of Imports, this would mean that GDP growth had been slashed to a figure like -50%, which would of course means frank death 'n destruction on a Biblical scale.

    Also don't forget, Art Berman said not that long ago that he thinks about 80% of the EIA reported oil glut is a fiction. But alas, our Editorial Staff (me) can't find that damn link now.

    Anyway, good post, something you can throw in the mix when you're grinding it out in the Comments section with the Trump voters.  I think, by 2024, the sharp campaign slogan will be, "Make America Even Exist Again!"

    Cheers,

    B.G. in Wisconsin

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