An inconvenient truth in global crude

The inconvenient truth is whether climate change is just the weather or not. This thought of mine was triggered when leafing through some obscure, “we can’t throw that out,” July edition of a magazine with a picture of Al Gore in Hawaii and the caption: “Boy is it hot here! Told ya so!”

I haven’t seen Gore’s follow-up photos from, say, Minneapolis in the last two months, with the caption: “Boy it’s cold here. And I mean really cold”. I guess that’s why “global warming” has now been Goreified to “climate change.” But climate change in January just isn’t as sensational as in July.

But enough of selective science.

Change is a word that is appropriate at any time of the year, and anywhere in the world when it comes to energy. The observations of factual supply and demand data are there for all to see in the shape of the comprehensive weekly inventory report, as issued by the U.S. Department of Energy. These numbers are then massaged, sometimes in Gore-like fashion by a clan of speculators holding either a metaphorical half-full or half-empty glass of foaming guesswork.

Rising rack and pump prices are giving cause for whispers of concerns that Brent crude, global crude, currently at $69/bbl is headed for $80/bbl – and soon. This would add $0.07/L to the rack and pump prices without the annoying interference of various government levels adding penalties for carbon content of vilified but economically crucial fossil fuels.

Why the doom and gloom? I can’t see this happening.

The run up we are seeing in crude is not due to North American inventory level panic. Yes, U.S. crude levels have been declining over the last six weeks but even so, they remain at the midpoint of the 5-year average. The draw down in crude is perfectly balanced with the inventory builds for gasoline and distillates, which, in turn, are in tune with the demand for all refined products. In fact, when it comes to gasoline inventory levels they are at the peak of the 5-year average.

Crude and refined product increases are due to speculator concerns of lower global, not North American, crude levels, which I have pooh-poohed as per above.Then they say that U.S. domestic shale production is slowing. Double pooh-pooh I say, as they dropped by all of six drilling rigs last week.

Lastly, it’s because of strong demand for U.S. shale oil and for gasoline. OK I buy that. U.S. shale is so light that it can be used by any refiner to cut back high viscosity, high sulphur crudes that are preferred on a cost basis by refiners worldwide.

The reason for higher prices at the street level is that the Saudis need high crude prices in preparation for their Saudi Aramco IPO, estimated with a value at north of $1 trillion. The higher the Brent price, the higher the asset value in the IPO. The inconvenient truth is that the higher the crude price goes, the greater the incentive for increased U.S. shale production, which then eats into the OPEC market share.

The IPO, and the next meeting of OPEC to evaluate the production cut success is in June. If Brent crude keeps increasing, then fringe OPEC members will insist that crude production increase to protect their market shares. Higher OPEC production will lower the prices of crude and all refined products.

That will be both convenient and truly conclusive.

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Roger McKnight is the Chief Petroleum Analyst with En-Pro International Inc.
Roger has over 25 years experience in the oil industry, and has held senior marketing management positions responsible for national and international accounts. He is the originator of the card lock concept of marketing on-road diesel that is now the predominant purchase method of diesel in Canada. Roger's knowledge of the oil industry in North America, and pricing structures has resulted in his expertise being sought as a commentator by local, national, and international media. Roger is a regular guest on radio and television programs, and he is quoted regularly in newspapers and magazines across Canada.

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