The oil scam

In the years to come, economic or other historians would chronicle the political economy drivers of the slide in the oil price to USD26 per barrel earlier this year and its equally bizarre recovery by almost 100% since then.

Look at the highlights of the September ‘Oil Market Report’ (OMR) of the International Energy Agency (IEA):

Global oil demand growth is slowing at a faster pace than initially predicted. For 2016, a gain of 1.3 mb/d is expected – a downgrade of 0.1 mb/d on our previous forecast due to a more pronounced 3Q16 slowdown.

Recent pillars of demand growth – China and India – are wobbling. After more than a year with oil hovering around $50/bbl, the stimulus from cheaper fuel is fading. Economic worries in developing countries haven’t helped either. Unexpected gains in Europe have vanished, while momentum in the US has slowed dramatically. The result has been a slump in oil demand growth from a robust 1.4 mb/d in the second quarter to a two-year low of 0.8 mb/d in the third.

OPEC crude production edged up to 33.47 mb/d in August – testing record rates as Middle East producers opened the taps. Kuwait and the UAE hit their highest output ever and Iraq lifted supplies. Output from Saudi Arabia held near a record, while Iran reached a post-sanctions high. Overall OPEC supply stood 930 kb/d above a year ago.

OECD total inventories built by 32.5 mb in July to a fresh record of 3 111 mb.

Our forecast in this month’s Report suggests that this supply-demand dynamic may not change significantly in the coming months. As a result, supply will continue to outpace demand at least through the first half of next year.

OMR from IEA is released only with a lag for the public. It is a premium product for subscribers. The highlights of the October 2016 too are now available to the public but not the full report. Here are the key highlights of the highlights!:

Demand is forecast to expand by 1.2 mb/d this year, with a similar gain expected in 2017. Growth continues to slow, dropping from a five-year high in 3Q15 to a four-year low in 3Q16 due to vanishing OECD growth and a marked deceleration in China. (my comment: oh, yes! this economy is growing at 6% to 7% per annum, of course)

This is a good short, non-political take on what happened to the price of oil in the last two years:

To be sure, the rapid rise of US light tight oil (LTO) and OPEC’s free-wheeling strategy triggered dramatic changes in the world of oil. The price of crude fell from triple digit highs to below $50/bbl. Lower prices at the pump initially fuelled strong gains in demand, but growth has since slowed markedly after subsidy cuts in emerging markets, economic headwinds in some countries and demand saturation in the developed world. On the supply front, relentless growth from non-OPEC – particularly US LTO – has swung into contraction, as forecast in our previous reports. At the same time, production from OPEC – driven mainly by low-cost Middle East supply – has risen to all-time highs. The net result is a massive oil inventory overhang that is keeping the market under pressure.

Even with tentative signs that bulging inventories are starting to decline, our supply-demand outlook suggests that the market – if left to its own devices – may remain in oversupply through the first half of next year.

Both the slide and the subsequent recovery have been orchestrated – big time. Lance Roberts has an explanation for the latter, though:

The Federal Reserve is trying very clearly to accomplish several goals through their very confusing ‘forward guidance:’

1. Keep asset prices above the recent lows to avoid triggering a rash of potential ‘margin calls’ that would fuel a more rapid price reversion in the markets.

2. Talk down the “dollar” to provide a boost to exports (which makes up roughly 45% of corporate profits)and commodity prices. The Fed-assisted boost in oil prices also gives TBTF banks the room necessary to off-load bad energy-related debt exposure before the next price decline and run of defaults.

3. The Fed also realizes they cannot allow market prices to overheat to the upside and, therefore, use offsetting language to quell expectations.

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