The Fuse

From U.S. Gasoline Demand to OPEC Policy: The Top 10 Oil Market Stories in 2015

by Matt Piotrowski | December 18, 2015

10) Price matters: U.S. gasoline demand soars

After years of decline and stagnation, U.S. gasoline skyrocketed in 2015, the result of lower pump prices and stronger economic growth. The country’s daily average, around 9.15 million barrels per day for the year, up around 3.5 percent year-on-year, is still below the 9.28 mbd record set in 2007, but if prices remain at low levels throughout 2016, the previous peak could be shattered. There weren’t many bullish trends or events in 2015, but this was one of them.

9) Putin won’t cut: Russia hits post-Soviet record production despite sanctions, low price

The Russian economy was pillaged this year by low prices, Western sanctions, and a sharp depreciation in the ruble. Nonetheless, Russian crude output averaged 10.77 mbd in 2015, up by about .1 mbd annually. Saudi Arabia said it would cut production to lift up prices if non-OPEC producers, including Russia, also went along and throttled back. It’s clear that’s not in Russia’s plans. How Russia performs in the coming year in the face of low prices will be a key market indicator, and so far, it appears output will continue to rise.

8) Bad timing: Mexico’s lackluster bid round

Mexico’s opening of its oil sector to international oil companies was expected to usher in a new era and halt declining production after almost eight decades of the government running the country’s petroleum industry. But so far, interest has been muted. Low oil prices were the major reason behind the lack of interest. Mexico will have to sweeten terms in order to get the attention of more IOCs. Despite the opening bid round being a flop, the move is a positive for the country and industry as it reflects a pivot away from resource nationalism.

7) Oil production in the time of war: Iraq increases output despite fight with ISIS

Iraqi oil production rose throughout the year, jumping to 4.2 mbd and exports steadily averaging above 3.5 mbd. The robust levels came despite low prices, the country’s ongoing war with ISIS, and Baghdad’s spat with Erbil over oil revenues. Exports in the south rose, but the big news was shipments in the north through Turkey totaling almost .6 mbd, as the Kurdistan Regional Government increased independent oil sales. Iraq, like other OPEC members, is in a fight for market share, particularly in the Asia-Pacific region, the main demand growth region.

6) Bears everywhere: Hedge funds reach record short positions.

Hedge fund selling throughout the past year and a half has, at times, accelerated downward price moves and increased volatility.

By the end of 2015, everyone, literally everyone, was bearish crude. Every trader, analyst, politician, OPEC member, oil company and media outlet was pessimistic about the direction of oil prices as U.S. benchmark West Texas Intermediate (WTI) and European marker Brent tumbled throughout 2015, reaching multi-year lows in December. Hedge funds and other financial investors, which typically bet on the oil price to rise, increased their short positions to a record in the aftermath of OPEC’s December meeting, when the group didn’t take action to shore up prices. As of the second week of December, speculators in both WTI and Brent hat totaled roughly 364,000 contracts, the equivalent of 364 million barrels of oil. Hedge fund selling throughout the past year and a half has, at times, accelerated downward price moves and increased volatility.

5) History made: Iran and world powers strike nuclear deal

In mid-July, the P5+1 and Iran agreed to comprehensive Joint Plan of Action regarding the future of Tehran’s nuclear program. The agreement lifted sanctions on Iran’s oil exports, pending final authentication from the International Atomic Energy Agency (IAEA), which should occur early 2016. The oil market, predictably, sold off after the announcement of the deal, and there was a lot of talk throughout the second part of the year whether other producers, chiefly Saudi Arabia, would cut back to make room for Iran’s volumes in 2016. That obviously did not happen. With Iran expected to increase exports, to the tune of .5 mbd, into an oversaturated market, this issue should be one of the top five stories for 2016.

4)  Energy insecurity: China buys more SPR oil, U.S. sells it off

While China is expanding its SPR, the U.S. is scaling back as the government plans to sell some 66 million barrels of crude for transportation funding.

China’s crude imports averaged about 6.6 mbd in 2015, a substantial 9 percent bump versus a year ago. The higher levels were in large part the result of China filling its strategic petroleum reserve (SPR). As its economy grows (although at a slower pace) and its import dependency rises, Beijing is becoming more concerned with energy security in case of supply disruptions. Hence, the country is buying aggressively, thanks in part to low prices, with some estimates suggesting about .4 mbd is going into strategic tanks. While China is expanding its SPR, the U.S. is scaling back as the government plans to sell some 66 million barrels of crude for transportation funding. Whether this is a smart budget move or a foolish decision regarding energy security will be up in the air for years to come, particularly if more projects are funded with SPR sales. Whatever the case, it shows how abundance in the age of shale oil and gas has sharply altered policy makers’ thinking on energy.

3) Your forecasts were wrong: Shale’s resilience

There was much scrutiny on U.S. shale output this year, and with good reason. The large growth in shale was the main reason for the price plunge in 2014. The question now is how producers have shown such resilience through the low price environment. So far, shale has outperformed expectations, and its continued strength pushed prices down further this year, into the $30 range. U.S. production peaked at 9.6 mbd in April, and even though it has fallen by about .4-.5 mbd since then, it is still enough to keep the U.S. market glutted, with crude inventories hovering near record levels. Technology, improvements in efficiency, refracking and robust producer margins helped keep shale output afloat. Continued weak prices, tighter capital markets, and higher interest rates will test shale producers in 2016. Most analysts see further declines in production, but how sharply this occurs will matter in how quickly fundamentals rebalance.

2) Congress strikes a deal: Lifting the ban on crude exports

After an intense lobbying effort from the oil industry for about four years to allow crude exports, Congress struck a deal in December to nix the 40-year-old ban. Momentum to lift the ban was slow and President Obama had promised to veto any measures to allow exports, but the pace picked up this year with Republicans coalescing around the issue. It turns out, however, that the U.S. oil industry does not appear to gain much from it, at least in the near term. With the global market oversaturated and U.S. oil prices close to parity with international marker Brent, it is not economic for U.S. producers to sell outside the U.S. Moreover, U.S. refiners are reconfiguring their plants to take in more domestic light crude, and may be able to mop up any surpluses in the future. When producers began lobbying for a repeal of the export ban, U.S. prices traded sometimes in excess of $20 below international prices, which were well above $100. The market has changed drastically since then. How much of an effect lifting the ban has on export volumes and U.S. foreign policy is a big wild card. The economics of exports will ultimately depend on price spreads. If shale outputs rebounds and WTI falls sharply relative to international prices, the new law would then make an impact.

1) Let’s meet and do nothing: Opec keeps pumping at high levels

Producer group OPEC did not only pass on making any production cuts in 2015; it also increased output by roughly 1.25 mbd throughout the year to average 31.73 mbd in the fourth quarter. The cartel’s failure to take action was one reason oil prices kept falling throughout the year. In all, Brent is down about $40 from November 2014, when OPEC made its historic decision to allow the price to rebalance fundamentals, and down almost $80 from the 2014 peak in 2015. The group is currently in disarray with members split on what course to take and more oil is coming from Iran next year. Moreover, the group couldn’t agree on a production target at its December meeting in Vienna. There’s been a lot of commentary that the cartel is powerless to manipulate the market and its dysfunction will ultimately bring its demise. But pundits should be cautious. Declines in non-OPEC supply, continued emerging market growth, geopolitical production outages, and OPEC’s massive reserves will give the cartel importance for decades to come.

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