- Global oil demand has remained robust, with US gasoline demand in particular rebounding strongly following lower pump prices. - While crude oil production is falling worldwide and in the US year-over-year, total oil supply is still growing due to surging production of natural gas liquids (NGL). - NGL production, which is masking the decline in crude oil output, has grown rapidly in the US and globally in recent years. If NGL growth slows, the oil market imbalance could correct more quickly.

1. Thoughts on the Oil price. 4/10/16
There’sa huge amountof short termnoise aroundthe Oil price.Itry to take a more fundamental view,
basedaroundchangesin physical oil demandandsupply. If the chief cause of the collapse inthe Oil
price isexcesssupplyoverdemand,thenthe route tohigheroil pricesintounderstandandbe ontop of
the route by whichdemandovertakessupply.
The firstpointto make is thatdemand has beenrobustand in manycasesquite strong.US gasoline
demandreactedimmediatelytothe sharpfall inpumppricesand hascontinuedtobe strong, whether
fromthe weeklyUSgasoline demandstatisticsorthe US Dept of transportmilesdrivendata. The same
istrue inChina,where strongdemandandfallingdomesticproductionthenshowsupasrisingimports
of crude oil inthe monthlyChinese customsdata.So,Global demandisstronganddoingit’sbitto
rebalance the market.
The charts belowhighlightthe robuststate of global oil demandandthe resurgence inUSgasoline
demand,whichalone is10% of global oil consumption. Globaldemandisgrowingsteadilyasthe 2nd
chart shows.
Whichbringsus to Oil supply,whichisthe crux of the matter.
The consensual viewisthat
 Saudi Arabiaisresponsibleforthe currentglobal surplusastheyhave rampedupproduction
and have the abilitytoramp itup further.
 Levelsof oil storage andinventoryare veryhighandthe marketis takingtoolongto balance
out.
 US productionisfallingslowlybutthe shale drillersare poisedtosignificantlyraise production
quicklyif pricesmove muchhigher.
I wouldtake issue withall 3of these assumptions.

2. Yes,Saudi didraise production,eventually.ButIraqisalsothe keydriverbehindthe increaseinOpec
output.Saudi oil demandisalsorisingrapidlyandalthoughthe dataishard to getholdof,it lookslike
the levelsof Saudi exportshave barelychangedinrecentyears. Iranisalmostbackto its shortterm
productioncapacityandUS banksremainveryreluctanttofinance anygenuine reconstructionof the
Iranianoil infrastructure.There couldwell be little ornospare capacitywithinOPEC,apart fromLibya.
Thisis the viewof the CEO of Core Labs,a highendUS oil Service Companywhichspecializesinreservoir
enhancementtechniques.
Oil inventoriesare highinthe USA and the marketseemsobsessedwiththe weeklyUSinventorydata.I
tendto ignore themasreactingto a badlyconstructedestimate of aweeklynumber,giventhatthe
global oil marketremainsoversuppliedistomymindirrelevant.Oil storage levelsoutside the USare no
wayas nearlyelevated.
Whichbringsus neatlyontoUS supply.
Since the shale revolutiongotusintoa positionof global oversupply,thentheyalsohave tobe part of
the solution.
The EIA produce monthlyUS crude oil productiondata. Sept30st
saw the July data publishedandJuly
was -747,000 bbl/day downon a yearago.
So,as the top 2 charts show,US CRUDE OIL productionisfallingfast.
Thisdata is forCRUDE OIL, andexcludesNatural GasLiquids(NGL),mostof whichisoil andoil products
that comesoff wetgas production. SowhilstUSCRUDE OIL productionissub9m bbl/day(the figure the
mediausuallyquotes),total USoil production(incNGL) ismuch higher.
“production”iscrude oil but “supply”includesanumberof otherproductcategories.
THIS IS KEY TO UNDERSTANDING WHAT’SREALLY HAPPENING IN TERMS OF THE SUPPLY“GLUT”.

3. The EIA publishworld crude oil production.Thisisamonthbehindthe US,so we have data up to JUNE
2016. Worldcrude Oil production rose slightlyInJUNEoverMAY as Saudi rampedupproductionto
meettheirdomesticsummerpeakdemand,IrancontinuedtobuildproductionandCanadabounced
back fromthe impactof the wildfiresinAlberta. Butevenso, WorldCrude Oil productionis still falling
year on year.
So, ifdemand is growing by around 1.1m bbl/day and crude oil productionis fallingby -700,000
bbl/day, why the renewedfearsofa glut lastingwell into 2017?
The answerliesinthe continuedgrowthinNGLoil supply,whichismaskingthe sharpfallsin Crude Oil
production.
The world Crude Oil Production data seemsatoddswiththe official EIA global supply dataandforecast
for WorldOil supply. It’sthissupply numberthatthe marketfocusesonand the forecastsforWorldOil
supply thatdrivesthe viewthatthe marketbalancessometimenextsummer,2017, if not later.

4. The Global Oil Supplyof 97m bbl/daytiesinwiththe EIA data onTOTAL OIL SUPPLY, which includes
NGL, refinerygains,nearoil productsetc
The oftenquotedUS oil productionof sub9m bbl/dayispart of the EIA data on WORLD OIL
PRODUCTION,justthe blackstuff and around79m bbl/dayglobally.
The gap is around18m bbl/dayspreadacrossthe globe.That’sa prettybignumber….. 6.1m bbl/dayin
USA, 4.5m in OPEC,1m CANADA
The chart belowshowsthe yearonyearchangesin these definitions,withCRUDEOIL fallingby -700/- ,
TOTAL OIL SUPPLY up +300/- andall due toa stunningyearonyear +1.0m bbl/dayincrease inthis“near
oil”category.
So we have thishighlyseasonal but very recentlyrapidlygrowing “near oil” maskingthe decline in
global crude oil production.
PRODUCTION GROWTH IN GLOBAL CRUDE OIL,NGL & TOTAL OIL SUPPLY
In the USA the picture isthe same – rapidlyfallingCRUDEOIL productionbeingmaskedby the growthin
NGL.

5. If it was justdownto Crude Oil Productionandif NGL’shad grownin line withCrude Oil,we would
probablybe in-balance bynow.
Thisrapid growthinNGL has gone underthe radar somewhat. ItislinkedtoGasproductionlevels,but
the importantpointto make isthat WORLD CRUDE OIL PRODUCTIONis falling year onyear,even
before the recentOPECagreement.
If we have resilientdemandgrowthaddingtoglobal demandeachandeverymonth.If global crude oil
productionisnowdownyearon year (whichmayexplainwhyUScrude oil inventoryhasstartedtofall),
thenunlessNGL’scontinue torise yearonyear (andtheyfell backbothinUSA and the World onthe
latestdata),the marketisalready startingto balance itself out.
So howquicklyare thingsmoving?
Thishorriblycomplicatedcharttriestoshow lookingatthe annual change in demandoversupplyto
gauge justhow quicklythe glutisdisappearing.

6. Here I’m usingthe latestmonthly‘flash’numbersforglobal crude oil production. (BLUELINE) andthe
latestestimate forGlobal Oil supply(incNGL)
The current 1m bbl/daygrowthinNGL explainsthe gapbetweenthe 2lines.
DAILY RATE AT WHICH DEMAND GROWTH EXCEEDS SUPPLY GROWTH
So the questiontoaskthe Oil analystsiswhatisdrivingthe rapidcurrentgrowthin NGL and whatdo we
assume forthisrate of growth goingforward?
Because withoutthe NGLgrowthwe’dbe veryquicklyheadingintodeficitintermsof the global oil
demand/supplybalance giventhatcrude oil productionisalreadyfallingyearonyear.
BM 4/10/16