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Miracle on Oil: US Producing Record 10.8 Million Barrels a Day

Miracle on Oil: US Producing Record 10.8 Million Barrels a Day

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Thursday, 14 June 2018 08:02 AM Current | Bio | Archive

Energy: Balance Returns. There are more pushes and pulls affecting the price of crude. On the bearish side, the shale miracle continues to boost production in the US, OPEC quotas are up for debate at next week’s meeting, and Saudi Arabia and Russia have already started pumping more oil. And on the horizon, electric vehicles could weigh on oil demand if they’re broadly adopted. On the bullish side, renewed US sanctions against Iran could lower that country’s production, the dissolving society in Venezuela has crippled its oil industry, and the strong global economy has helped boost demand.

The US Energy Information Administration’s forecast calls for an oil market that’s in amazing balance. This year, it expects worldwide crude oil and liquid fuels production of 100.22 million barrels per day (mbd) and worldwide consumption of 100.29 mbd. The oil market has already placed its bet: The price of a barrel of Brent crude oil has jumped to $75.88, up 57% y/y (Fig. 1). But now it might move sideways for a while. Let’s take a closer look at the oil market ledger:

(1) Production increasers. The US oil miracle continues to keep the markets well supplied. US crude oil production jumped to 10.8 mbd at the start of this month, an all-time record (Fig. 2). Current production has increased 1.4 mbd from last year, helped along by the growing number of rigs deployed (Fig. 3 and Fig. 4). Despite the increased production, US crude stocks fell last week by 4.1 million barrels, more than the expected drop of 2.7 million barrels.

OPEC and Russia had cut oil production by 1.8 mbd since January 2017 in an effort to reduce inventories that had grown thanks in part to US production. But with the price of Brent recently popping over $80 a barrel, the oil industry leaders may consider their inventory-reducing job done.

Both Saudi Arabia and Russia reportedly have started pumping more oil in advance of next Friday’s OPEC meeting, where “official” production cuts are expected to be discussed. Russian production reportedly increased to 11.1 mbd earlier this month, which is 143,000 barrels a day above the country’s OPEC quota. It’s the third month in a row that Russia has pumped more than its quota, reported a 6/11 article in Oilprice.com.

Likewise, Saudi Arabia’s production rose by 161,400 barrels a day m/m in May, which brought its monthly production to just over 10 mbd, higher but still within its quota, a CNBC article reported Tuesday.

(2) Production decreasers. Venezuela continues to see its oil production shrink. Its production fell to 1.6 mbd, down from 2.2 mbd in 2016 and almost half the 3.0 mbd it produced in 1997. “Venezuela's oil sector has been plagued by spiraling debt, mismanagement, corruption, crumbling infrastructure and a lack of investment,” according to a 4/12 article in S&P Global Platts. “Sources have told S&P Global Platts production and exports have been tumbling in the past year as state oil company PDVSA has been struggling to secure diluents and other chemicals needed to pump crude, keeping its refineries operational and maintaining deteriorating infrastructure.”

Potential oil production decreases in the future may come from Iran. In May, the US announced it would reinstate sanctions against Iran and any companies doing business in Iran. European and Asian banks, insurers, and oil companies may have to reduce their business in Iran as a result, and that could dent Iran’s oil production by the end of this year, according to the EIA.

“Iran’s OPEC governor, Hossein Kazempour Ardebili, told Reuters last week that the oil price could jump to $140 if U.S. sanctions hurt his oil exports from this country, the third biggest producer in OPEC behind Saudi Arabia and Iraq,” a 6/12 Reuters article reported. The article addressed concerns that the worldwide industry’s spare capacity could shrink from “more than 3 percent of global demand now to about 2 percent, its lowest since at least 1984, if [OPEC], Russia and other producers decide to increase output” when they meet next week.

(4) The renewable wild card. The impact that renewable energy and electric cars will have on the oil industry is the ultimate wild card. The price of deploying renewables has now become competitive with that of using other fuels, and the variety of electric cars and deployment of electric chargers have increased dramatically. While not scientific, it feels like a tipping point may be approaching.

The 6/11 WSJ presented a great article about the state of the renewables industry. “In 2017, the global average cost of electricity from onshore wind was $60 per megawatt hour and $100 for solar, toward the lower end of the $50 to $170 range for new fossil-fuel facilities in developed nations, according to the International Renewable Energy Agency,” the article reported.

At the same time, spending to develop renewable sources has increased. “In 2016, the latest year for which data is available, about $297 billion was spent on renewables—more than twice the $143 billion spent on new nuclear, coal, gas and fuel oil power plants, according to the IEA. The Paris-based organization projects renewables will make up 56% of net generating capacity added through 2025,” the article states.

Similarly, the drop in battery prices has started to make electric vehicles a viable alternative to gasoline-powered cars. Battery prices fell 35% last year, and by 2040, long-range electric cars will cost less than $22,000 in today’s dollars and account for 35% of all new vehicle sales, according to projections cited in a 2/25 Bloomberg article.

The article then assumes EV sales continue to grow by 60% annually worldwide (matching what they did last year) through 2023. If that occurs—and it’s undoubtedly a mega “if”—it would replace oil demand of 2 million barrels a day by 2023, potentially creating a glut equal to the one that caused the 2014 oil drop. A drop in demand is certainly not priced into today’s oil prices. EV demand is undoubtedly something oil investors will need to watch.

(5) Energized energy stocks. As you’d expect, the resurgent price of oil has boosted earnings expectations in the oil industry. The S&P 500 Oil & Gas Exploration & Production industry was perhaps hurt the worst by the oil glut, and now it stands to rebound the most. The industry’s revenues are expected to jump 19.7% this year and 7.5% in 2019 (Fig. 5). Likewise, earnings for the industry are forecast to surge 601.4% this year and 20.2% in 2019 (Fig. 6). The industry’s stock price index has climbed 25.2% y/y, almost twice the S&P 500’s 14.7% return over the same time (Fig. 7).

The Energy industry’s stock price index with the best one-year performance is S&P 500 Oil & Gas Refining & Marketing, with a 53.6% y/y gain (Fig. 8). The industry is expected to see 2018 revenue growth of 15.6%, slowing to 3.7% growth in 2019 (Fig. 9). Meanwhile, earnings are forecasted to grow 45.2% this year and 30.0% in 2019 (Fig. 10). Despite the strong earnings growth, the industry’s forward P/E has climbed toward the top of its normal range, at 14.1.

Two other Energy industries that analysts expect to generate booming earnings are the S&P 500 Oil & Gas Drilling industry (returning to a profit in 2018 and growing earnings 60.2% in 2019), and the S&P 500 Oil & Gas Equipment & Services industry (59.9% earnings growth in 2018 and 49.9% growth in 2019).

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.

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Miracle on Oil: US Producing Record 10.8 Million Barrels a Day
oil, us, barrels, crude
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2018-02-14
Thursday, 14 June 2018 08:02 AM
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