The Oil Price Collapse of 2018: More Than a Correction Shreveport Geological Society March 19, 2019 Art Berman Labyrinth Consulting Services, Inc. Labyrinth Consulting Services, Inc. Slide 1 artberman.com
Oil prices collapsed in early October but Have Recovered to High-$50 Range WTI has recovered 39% of the price decline from the 2018 oil-price collapse. • $59.09 vs. $42.53 bottom in late December. • Price collapse was signal to shale companies to stop over-producing. • The message will be repeated until action results. • WTI has been above the 100-day average since March 1. • Price is -$7.75 less than 200-month average vs. +$10.58 above on October 3. • Labyrinth Consulting Services, Inc. Slide 2 artberman.com
Comparative Inventory and Oil Price Current front-month WTI price of $59.37 is correctly valued Last time comparative inventory (C.I.) was at current +9 mmb level, WTI was $65.72 $125 That price was over-valued based on C.I. yield curve $120 $115 270 April 2015 $110 239 $105 Last time CI was at current Feb 2017 $100 level, WTI was $65.72 212 220 $95 Crude + Refined Product Comparative Invneory (mmb) Nov 2014 $90 mid-cycle $85 170 OPEC+ price $72 $80 $75.34 Output $72.36 $75 WTI Price ($/barrel) Cut $70 $65.72 $67.18 120 $65 WTI Spot Price $60 $61.28 $56.35 (LHS) $53.34 Mar 2018 $55 mid-cycle $50 70 price $61 $45 Oil $45.26 $40 Over-Supply $35 9 9 8 20 Positive C.I. $30 $25 Oil Under-Supply $20 -30 $15 Negative C.I. -36 $10 $5 Source: EIA & Labyrinth Consulting Services, Inc. EIA 2019/Weekly Updates/Crude Oil & Refined Products Inventories & CI -80 $0 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 Feb-19 Mar-19 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 ~9 mmb level, WTI was $65.72/barrel vs $56.35/barrel today. • That price was ~$3 over-valued and current price ~$4 under-valued. • Today’s WTI front-month price of $59.37 is correctly valued. • Why isn’t this generally understood? • Labyrinth Consulting Services, Inc. Slide 3 artberman.com
Comparative Inventory-Price Yield Curve Yield Curve Mid-Cycle Price Marginal barrel or mmBtu price at the 5-year average needed to maintain supply Supply Less Certain Supply More Certain Higher Price Needed to Lower Price Needed to Maintain Supply Maintain Supply - + Comparative Inventory (C.I.) Source: Aperio Energy Research & Labyrinth Consulting Services, Inc. Inventory is part of supply. Demand is consumption, net imports & movements into & out of • 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. • Labyrinth Consulting Services, Inc. Slide 4 artberman.com
2018 Oil-Price Collapse Was More Than a Correction: Markets Devalued Brent WTI comparative inventory data back on July 2017-2019 yield curve Markets appear to Have de-valued Brent from October to December 2018 OECD minus U.S. comparative inventory (C.I.) crossed the 5-yr avg at ~$57 after sentiment-based excursions above & below October - February $120 Previous crossing in Mar-Apr 2018 was ~$72--suggests ~20% price devaluation EIA inventory forecasts put Dec 2019 on YC at +24 mmb & $58 WTI price $115 $135 $130 Late 2013-early $110 2019 crude selected product inventories 2014 Market $125 Jun 2014 based on March EIA STEO forecast Optimism $105 $120 (-58, $111.80) $115 $100 $110 2014-June 2017 $95 $105 Jan 2014 - June 2017 Yield Curve Source: EIA & Labyrinth Consulting Services, Inc.- Aperio Energy Research Early 2014 $100 $90 July 2017 - Dec 2018 $95 Market $85 2019 Forecast $90 Optimism Nov 2014 $80 Oct $85 Sep 2010-2011 $80 $75 $79 2011-2013 $75 Aug Sep $71 Oct 2018 Spring 2015 Mar-June 2015 $70 $70 $70 Nov 2014- Jun 2017 Feb $64 Optimism False Optimism May 2018 $58 Dec 2019 $65 $65 Dec '16 - Apr '17 Early 2017 Jul 2017-2019 $60 July 2016 OPEC+ Optimism Production-Cut Optimism Jan $62 $60 $54 Mar 2019 Dec (+157,$44.95) Nov $55 2019 Mid Cycle Feb $55 $50 2014-2018 $57 mid- Yield Curve? Price Jan $45 Yield Curve $50 cycle price $40 Dec Brent Price ($/barrel) $45 $35 July 2017-2019 WTI Price ($/barrel) EIA 2019/STEO/ STEO Master $30 $40 Yield Curve Late 2015-Early 2016 $25 Market Pessimism $35 $20 $15 $30 $10 Late 2015-Early 2016 $25 $5 Comparative Inventory (C.I.) Millions of Barrels Crude + products comparative Inventory (C.I.) Millions of Barrels Market Pessimism Source: EIA STEO & Labyrinth Consulting Services, Inc. $20 $0 -50 -40 -30 -20 -10 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230 240 250 -200 -180 -160 -140 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 120 140 160 180 200 • The price collapse was in reaction to global over-supply and was not merely a correction. Some analysts mistakenly think that everything is back-to-normal now that prices have • stabilized—comparative inventory yield curves suggest that they are wrong. Markets appear to have de-valued Brent from October to December 2018. • • OECD minus U.S. comparative inventory (C.I.) crossed the 5-yr avg at ~$57. • Previous crossing in Mar-Apr 2018 was ~$72--suggests ~20% price devaluation. WTI comparative inventory data back on July 2017-2019 yield curve after sentiment-based • excursions above & below October – February. EIA inventory forecasts put Dec 2019 on YC at +24 mmb & $58 WTI price. • Labyrinth Consulting Services, Inc. Slide 5 artberman.com
Mechanics of Comparative Inventory 2018 Oil-Price Collapse Coincided With Change from Comparative Inventory (C.I.) Deficit to Surplus 1,200 $300 1,150 $250 Inventories Mar Feb 2017 Ivnetories & 5-Year Average of Crude Oil + Products (mmb) 2016 1,100 (LHS) $200 OPEC+ 1,050 Cut WTI Price ($/barrel) $150 Comparative Inventory 1,000 (RHS) Spring 5-Year Avg $100 2015 (LHS) 2018 950 False Oil-Price Price Rally Collapse $50 900 Mar 2018 C.I. Surplus $0 850 Mid Jan Nov C.I. Deficit 2019 2014 800 -$50 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Source: EIA & Labyrinth Consulting Services, Inc. EIA 2019/Weekly Updates/Crude Oil & Refined Products Inventories & CI 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. • Labyrinth Consulting Services, Inc. Slide 6 artberman.com
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