Using Comparative Inventory to Bet Against the Oil Market

Transcription

1 Using Comparative Inventory to Bet Against the Oil Market Art Berman MacroVoices Live Vancouver January 19, 2019 Slide 1

2 Oil-Price Collapse and Previous Collapses $220 Oil-Price Collapse Appears to be Over For Now $210 WTI low price was $42.53 on Dec 24, a -44% decline from Oct 5 high of $ Smaller percentage drop than 2008 or but similar rate of decline (-.97/day) $/Barrel $190 $180 $170 $160 $150 $140 $130 $110 $90 $70 $30 $10 1/3/07 5/3/07 9/3/07 1/3/08 5/3/ Price Collapse WTI Change WTI Change % Number of Days Rate ($/day) % < 200-Mo Avg -$ % % $ % 63 -$ % $ % % 9/3/08 $ % $ /3/09 5/3/09 9/3/09 1/3/10 5/3/10 9/3/10 WTI Futures Price Source: Quandl & 1/3/11 5/3/11 9/3/11 1/3/12 5/3/12 9/3/12 1/3/13 5/3/13 9/3/13 1/3/14 $ % $ /3/14 9/3/14 $ /3/15 $ /3/15 9/3/15 $ /3/ Week Avg 200-Month Avg 5/3/16 9/3/16 1/3/17 5/3/17 9/3/17 1/3/18 5/3/18 $76.41 $65.99 $ % 9/3/18 $ /3/19 5/3/19 9/3/19 $79 $78 $77 $76 $75 $74 $73 $72 $71 $70 $69 $68 $67 $66 $65 $64 $63 $62 $61 $59 $58 $57 $56 $55 $54 $53 $52 $51 $49 $48 $47 $46 $45 $44 $43 $42 $41 $39 $38 $37 $36 $35 CL1 Price ($/barrel) WTI found a Bottom: Range Boundaries Probably ~$45 - $55 for Near-Medium Term WTI increased +$10.06 (24%) from Dec 24 low of $42.53 to Jan 10 high of $ /2/18 Jan 26 $ /16/18 1/30/18 2/13/18 2/27/18 May 21 $72.13 Jun 29 $74.15 Mar 23 $70 $ /13/18 3/27/18 4/10/18 4/24/18 5/8/18 5/22/18 6/5/18 6/19/18 7/3/18 7/17/18 7/31/18 8/14/18 8/28/18 9/11/18 Oct 3 $76.41 $64.75 $65.01 Jun 4 Aug 15 $ Apr 6 $59.20 Price Mar 7 Feb 9 Jan 10 $ Week Avg.51 Source: Quandl & 9/25/18 10/9/18 10/23/18 $ /6/18 WTI Futures 11/20/18 12/4/18 $42.53 Dec 24 12/18/ Month Avg 1/1/19 1/15/19 $ /29/19 The oil-price collapse appears to be over for now. WTI low price was $42.53 on Dec 24, a -44% decline from Oct 5 high of $ Smaller percentage drop than 2008 or but similar rate of decline (.97/day). WTI increased +$10.06 (24%) from Dec 24 low of $42.53 to Jan 10 high of $ WTI found a bottom: range boundaries probably ~ - $65 for near-medium term. Was this price collapse a correction? Was it a reaction to broader market sell-offs? Or was it more fundamental? Slide 2

3 Comparative Inventory and Oil Price Last time comparative inventory (C.I.) was at current 38 mmb level, WTI was $57.81 $ avg price for wk ending Jan 11 $7 - $8 under-valued $52.32 current front-month price ~$5 under-valued $115 $110 $105 $95 $90 $85 $75 $70 $65 $55 $45 $35 $30 $25 $15 $10 $ mid-cycle price $72.36 Nov 2014 WTI Spot Price Source: EIA & April OPEC+ Output Cut Oil prices are relatively high when Comparative Inventory (C.I.) is negative (deficit) & prices are relatively low when C.I. is positive (surplus). Many observers and analysts believe that current oil prices are too low. The last time C.I. was at current ~38 mmb level, WTI was $58/barrel vs $53/barrel today. Oil price is somewhat under-valued but not too low. Why isn t this generally understood? Feb $53.34 Last time CI was at current level, WTI was $57.81 $57.81 Oil Over-Supply Positive C.I. mid-cycle price $61 $61.28 Mar Oil Under-Supply Negative C.I Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan $ Crude + Refined Product Comparative Invneory (mmb) Slide 3

4 Comparative Inventory-Price Yield Curve Yield Curve Supply Less Certain Mid-Cycle Price Marginal barrel or mmbtu price at the 5-year average needed to maintain supply Supply More Certain Inventory is part of supply. Demand is consumption plus movements to & from inventory. A cross-plot of C.I. vs price results in a yield curve. The comparative inventory yield curve uses C.I. instead of maturity & oil price instead of yield. The concept is identical. The yield curve crosses the y-axis at the 5-year average. That is the mid-cycle price, the market-clearing price of the marginal barrel needed to maintain supply. The market is short on oil price when C.I. is positive, or more than the 5-year average, & long when C.I. is negative or less than the 5-year average. The slope of the yield curve reflects the market s sense of urgency about supply. Higher Price Needed to Maintain Supply Source: Aperio EnergyResearch & Lower Price Needed to Maintain Supply - + Comparative Inventory (C.I.) Slide 4

5 Changing Yield Curves and Excursions from the Yield Curve December avg $115 price of $49.52 was under-valued by ~$9 based on C.I. - Price yield curve $25 Crude + products comparative Inventory (C.I.) Millions of Barrels From 2014 through mid-2017, the yield curve had a steep slope & mid-cycle WTI price was ~$75/barrel. This was inherited from C.I. - price expectations in the period of high oil prices. As C.I. approached the 5-year average, markets realized that things had changed. In mid-2017, markets devalued oil prices because of perceived tight oil supply and costs. The resulting yield curve is flatter and has a mid-cycle WTI price of ~$61/barrel. There are obvious excursions from the yield curve it is not a mathematical regression because markets are subject to sentiment. The excursions are as important as the conforming data (behavioral economics). Early 2014 Market Optimism May Min (-34, $69.98) WTI comparative inventory (C.I.) has been increasing since May and is now 16 mmb more than the 5-year average Aug $59 $110 $105 $95 $90 $85 $75 $70 $65 $55 $45 $35 $30 Sep Oct Nov Dec (16, $49.52) C.I. for this chart based on EIA monthly stock data that measures somewhat different components than weekly data routinely shown 2014-June 2017 Yield Curve July Yield Curve Mar-June 2015 False Optimism Jan June 2017 July Dec '16 - Apr '17 Production-Cut Optimism Late 2015-Early 2016 Market Pessimism Source: EIA & - Aperio Energy Research Slide 5

6 Mechanics of Comparative Inventory 1,200 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus $300 Ivnetories & 5-Year Average of Crude Oil + Products (mmb) 1,150 1,100 1,050 1, Jan-14 5-Year Avg Apr-14 Jul-14 Oct-14 Nov 2014 Jan-15 Apr-15 Inventories Spring 2015 False Price Rally Source: EIA & Jul-15 Oct-15 Jan-16 Mar 2016 Apr-16 Jul-16 Oct-16 Feb 2017 OPEC+ Cut Comparative Inventory (RHS) Jan-17 C.I. Surplus Apr-17 C.I. Deficit Jul-17 Oct-17 Jan-18 Mar Apr-18 Jul-18 Late Sept Oct-18 Jan-19 $250 0 $150 - Comparative Inventory = Current Inventory Level minus 5-Year Average of Inventory Levels. Inventories consist of crude oil plus a basket of price-critical refined products. These include gasoline and diesel. When inventories exceed the 5-year average, C.I. is in surplus and vice versa. Slide 6

7 Comparative Inventory Explains WTI Price History since ,200 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus 1,200 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus $300 Ivnetories & 5-Year Average of Crude Oil + Products (mmb) 1,150 1,100 1,050 1, Jan-14 Apr-14 Jun 2014 C.I. Deficit Jul-14 Nov 2014 C.I. Surplus Began Source: EIA & Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Feb 2016 Jan-16 Apr-16 Jul-16 Inventories C.I. Surplus 5-Year Avg Jun 2015 Jun 2016 Nov 2016 OPEC+ Cut Announced Oct-16 Jan-17 Apr-17 Jun 2017 Jul-17 Oct-17 Late Sept C.I. Surplus Mar Began C.I. Deficit Began WTI Price (RHS) Jan-18 C.I. Deficit Apr-18 Jul-18 Oct-18 Late Dec Jan-19 C.I. Surplus Ivnetories & 5-Year Average of Crude Oil + Products (mmb) 1,150 1,100 1,050 1, Source: EIA & 800 Jan-14 5-Year Avg Apr-14 Jul-14 Nov 2014 Oct-14 Jan-15 Apr-15 Inventories Spring 2015 False Price Rally Jul-15 Oct-15 Jan-16 Mar 2016 Apr-16 Jul-16 Oct-16 Feb 2017 OPEC+ Cut Comparative Inventory (RHS) Jan-17 C.I. Surplus Apr-17 C.I. Deficit Jul-17 Oct-17 Jan-18 Mar Apr-18 Jul-18 Late Sept Oct-18 Jan-19 $250 0 $150 - The oil-price collapse coincided with the end of C.I. deficit that had characterized Inventories climbed relative to the 5-year average resulting in a massive C.I. surplus by early WTI prices fell below $30/barrel. The false oil-price rally to in the spring of 2015 was because of a short-term drop in C.I. The surplus began to decline in the 2 nd half of 2016 (reduced capital flows in 2015) & decline began in earnest after the OPEC+ production cut in early C.I. went into deficit in March. Capital flows and oil prices increased to $75 by October. The oil-price collapse coincided with a change from C.I. deficit to surplus in late September. That surplus continues to increase. Slide 7

8 Comparative Inventory has Explained Price Cycles Since Data Was Available $160 Nine Price Cycles Defined by Comparative Inventory vs WTI Price from Comparison of three price cycles defined by comparative inventory vs WTI price from $ Comparative Inventory (C.I.) Millions of Barrels NOV 2006 DEC Source: EIA & - Aperio Energy Research $ June 2017 $ June 2017 July $ $30 $10 Comparative Inventory (C.I.) Millions of Barrels Source: EIA & - Aperio Energy Research Nine price cycles defined by comparative inventory vs WTI price from U.S. inventory data first publicly available in This history shows that negative C.I. does not always result in high oil prices. This is best illustrated by the cycle in which markets expressed little supply urgency despite strongly negative C.I. (beware of outages with just-in-time supply). A similar situation exists with natural gas markets today in the U.S. The important take-away is that the current perception of low-supply urgency suggests that price may never return to levels unless that perception changes. Markets are ruthless & hate to over-pay. Slide 8

9 More History Explained by Comparative Inventory $160 $ oil-price collapse completely different from , & 320 $180 Price rally was geopolitical during period of comparative inventory (C.I.) over-supply Later collapses began during C.I. under-supply & largely independent of outages Price Collapse WTI Price Over-Supply (Positive C.I.) Comparative Inventory (mmb) 20 Under-Supply (Negative C.I.) Until about 2004, price fluctuations were low-amplitude compared to C.I. changes. Much smaller deficits after 2007 resulted in much higher prices. Markets became concerned about flat supply in the face of increasing demand from Asia. Geopolitical concerns arose about Middle Eastern oil supply with death of Saudi king, Iraq war & Iran s nuclear program. Also unrest in Nigeria, U.S. hurricanes Katrina & Rita, and refinery outages in the North Sea and U.S. contributed to supply concerns (we think there are geopolitical risks today!). Oil prices increased despite growing C.I. surplus. Demand destruction partly responsible for a price collapse in /6/95 Source: EIA & 1/6/96 1/6/97 1/6/98 1/6/99 1/6/00 1/6/01 1/6/02 1/6/03 1/6/04 1/6/05 1/6/06 1/6/07 1/6/08 1/6/09 1/6/10 1/6/11 1/6/12 1/6/13 1/6/14 1/6/15 1/6/16 1/6/17 1/6/18 1/6/ Slide 9

10 C.I. Just As Useful With Brent December average Brent price of $57.36 was ~$13 under-valued based on comparative inventory yield curve value of $65 - current front-mo price is.30 July 2014 & Sept have same C.I. but $29 price difference. Late 2013-early 2014 Market Optimism Jul '14 (-54, $106.77) Nov '14 OPEC Mtg Sep '18 (-52, $78.29) Current Yield Curve $72 Mid-Cycle Price Brent Price ($/barrel) $135 $130 $125 $115 $110 $105 $95 $90 $85 $75 $70 $65 $55 $45 $35 $30 $25 $15 $10 Nov '18 Dec '18 Spring 2015 Optimism Early 2017 OPEC+ Optimism Late 2015-Early 2016 Market Pessimism July 2016 (+157,$44.95) $5 Source: EIA STEO & Comparative Inventory (C.I.) Millions of Barrels Nov Jun Jul Mid 2017 Yield Curve OECD minus U.S. is the measure for C.I. vs Brent calibration. Different data frequency & reliability compared to WTI. Shape of Brent yield curve suggests lower supply urgency than for WTI. Mid-cycle price is ~$73/barrel. September C.I. minimum almost identical to July 2014 C.I. minimum but there is a $29 price difference. That is a measure of oil-price devaluation & effect of yield curve slope. December average Brent price of $57.36 was approximately $13 under-valued based on C.I. yield curve y-axis intercept. Slide 10

11 Betting Against the Market Using C.I. Early 2014 $110 Market Optimism $105 C.I. MIN May 4 WTI ~$5 under-valued at Jan 11 wkly avg price of.01 based on C.I. yield curve Comparative inventory (C.I.) increased mmb & is 38 mmb > 5-yr avg $115 $95 $90 $85 $75 $70 $65 $55 $45 $35 $30 $55 C.I. is current crude + products stock level minus 5-yr avg WTI ~$14 over-valued at $75.34 wk ending Oct 5 Jan 4 Jan 11 WTI ~$8 under-valued at $47.00 wk ending Jan 4 Mar-June 2015 False Optimism Extreme Market Pessimism Jan June 2017 July Dec '16 - Apr '17 Production-Cut Optimism $25 Late 2015-Early 2016 Crude + products comparative Inventory (C.I.) Millions of Barrels Market Pessimism All 3 major excursions Mar-Jun 2015, Late 2015-Early 2016 & Dec 2016-Apr 2017 were recognized as excursions as they were happening. The September October & November December were also recognized as excursions. Symmetry to latest excursions: December 28 price of $45.26 as undervalued as Oct 5 price of $75.34 was overvalued. The market is not wrong during excursions: uncertainty leads to price discovery. The key to betting against the market is having the calibration to know what is happening & to what level price is likely to return. C.I. WTI 1/11/ /4/ $47.00 Change 4.62 $3.01 5/4/ Change $18.37 Source: EIA, HSNO & - Aperio Energy Research Slide 11

12 The World is Over-Supplied With Oil The world was over-supplied with oil in and forecasts indicate over-supply in 2019 and Over-supply has characterized 4 of the last 5 years. Production-consumption balance has been increasing since Over-supply has been the norm since the Financial Collapse. The deficit in 2017 was because of OPEC+ production cuts of 1.8 mmb/d & production deficit was only -0.5 mmb/d. Oil market balance is mostly about supply and producer behavior. When capital flows to E&P companies, they over-produce. Demand changes slowly (except during serious recessions) but supply can change quickly. Slide 12

13 Comparative Inventory is Central For Understanding Oil Markets Oil markets are extraordinarily complex because oil is the master resource. It therefore, underlies and connects all elements of the global economy including the human psychology behind markets. The C.I. yield curve seems to integrate much of that complexity into two factors price & comparative inventory. The approach is not a solution but it provides outstanding calibration. Slide 13

14 The Path Forward NYMEX Oil Futures ($/Barrel) Extreme Frequency & Magnitude of Volatility Changes Since Oct 19 Road to higher oil prices may be less certain than in previous price cycles Sentiment about broader economy will have even more effect than usual Feb Feb $26.21 Feb Feb Nov Jun Oil-Price Volatility (RHS) NYMEX WTI Dec Nov Oct $ $ Dec 24 $ Oct Oil Volatility Index Source: EIA, CBOE, Bloomberg & Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 0 Oil prices are likely to move toward WTI & $70 Brent along an uneven pathway. There will be opinion leaders who proclaim a return to $90- prices in the relatively near term. Don t believe them. Proclamations about peak demand, the dominance of electric vehicles & renewable energy will persist. Neither believe the time frames nor that living standard will be more-or-less as it is today. Humans have never gone from a higher to a lower density source of energy. That path will be traumatic. Capital flows define oil market cycles. Supply and demand proceed naturally from capital flows. Slide 14