The Fuse

Key Charts Highlighting 2016 Presidential Campaign, OPEC’s Dilemma

by Matt Piotrowski | November 03, 2016

The 2016 election might not have brought big energy issues to the fore, but the outcomes at the national, state, and local levels could be large for oil and gas. While it’s up in the air what will occur regarding energy security after the election, it’s clear that results in the past have been mixed no matter what party held the White House. The U.S. has seen strong domestic crude oil supply gains under Democratic administrations, but those increases have typically been more the result of market forces than presidential decisions.

crude prod pres

The same could be said about gasoline prices, which have averaged $2.25 per gallon this year. Democratic and Republican presidents have enjoyed low prices, but on the flip side, both have had to feel the ire of voters when prices reached higher-than-normal levels.

election day gas

Today, Securing America’s Future Energy (SAFE) released its quarterly update to the Energy Security Fact Pack, a data-driven overview of the latest trends in energy security, including domestic and global oil production, and consumption patterns, oil market dynamics and prices, and up-to-date information on fuel efficiency and alternative fuel vehicles. The Fact Pack contains a number of data points that highlight OPEC’s dilemma and discuss energy issues that surfaced during the 2016 presidential campaign.

Below are other key highlights.

U.S. not energy independent

The issue of “energy independence,” a catchphrase that all presidents have uttered going back to Richard Nixon in the early 1970s, did come up on the campaign. Based on comments from the two candidates in the current election, it will be still be a priority no matter who wins. Democratic candidate Hillary Clinton stated in the second presidential debate that the U.S. is energy dependent. That claim was false. The U.S. has improved its energy security outlook in the past six years or so, as total oil demand has not returned to previous peaks and domestic output has surged. However, the country, despite these gains, still imports a large amount of crude oil and refined products, whose prices are set on the global market. Prices, of course, susceptible to wild swings and anti-competitive behavior from oil-producing countries, most notably OPEC members.

us oil trade

Republican candidate Donald Trump’s plan for achieving greater energy security involves supply-side solutions, most notably opening up federal lands and water to drilling. On federal lands and water, the U.S. holds some 232 billion barrels of undiscovered technically recoverable oil and gas reserves, but roughly 63 percent is off limits. The largest amount of these resources that are restricted or inaccessible is located on the Alaska OCS, where there is almost 50 billion barrels. While the U.S. does have large swaths of areas off limits to production, many of the resources are not economic with oil prices at current levels. Even if the green light was given to open up these areas, companies would not likely tap them in this environment.

 oil and gas resources

OPEC’s dilemma as non-OPEC supply takes major hits

With the OPEC meeting coming up later this month, all eyes will be on whether the cartel reverses course and takes action by cutting output to rebalance supply-demand fundamentals. The decision will have large ramifications on oil prices, U.S. shale, and internal OPEC dynamics. While the market has been oversupplied for the past two years, there are signs of a more balanced fundamental outlook with non-OPEC supply contracting. However, despite improvements, the oversupply persists and prices remain range-bound in the $40-$50 neighborhood, further complicating the decision-making in Vienna at the end of November. The market is still in surplus with global oil supply averaging roughly 480,000 b/d higher than demand in Q3, versus 1.27 mbd during the same time last year.

balance

In Q3, non-OPEC supply fell by 1 million barrels per day (mbd), this coming after a decline of 740,000 b/d during the April-June period. Most of the contraction has occurred in U.S. This is a stark turnaround from the 1.57 mbd rise during Q3 last year, a sign of how much of a toll low oil prices are taking on producers, and how successful OPEC’s November 2014 strategy of not throttling back was in undermining non-OPEC supply.

As a result of OPEC’s plan of pumping at high levels, spare capacity has dwindled to just 1 mbd, or 1 percent of consumption. Spare capacity, a cushion against supply outages or demand surges, has not been this low since 2008, when oil prices shot up to a record $147 per barrel.

spare cap

OPEC production rises

Despite signs of tightening, oil prices are falling once again after firming above $50 and the contango on the futures curves—with prompt prices weaker than deferred contracts—are widening, suggesting that fundamentals overall remain weak. While non-OPEC supply has taken big hits, rising OPEC production has offset most of those losses. Total global oil supply fell by 100,000 b/d in Q3, compared to the same time last year, the first decline since the beginning of 2013. Saudi oil supply rose by 370,000 b/d, with the rest of OPEC adding more than 500,000 b/d. The surge in supply jeopardizes a potential agreement. Now that OPEC is looking to change strategy in order to accelerate the rebalancing, the Saudis would have to bear the brunt of most of the cuts since others—Iran, Nigeria, Libya, and Iraq—are seeking higher output to make up for lost revenues from previous outages.

Demand growth relatively weak, EV sales surge

Besides high OPEC output, relatively weak global oil consumption growth is slowing the process of moving supply and demand into balance. For the quarter, world demand was up just 700,000 b/d year-on-year, as solid growth of 1.2 mbd in non-OECD countries was offset by declines in mature markets. The modest uptick for the quarter is in stark contrast to the sizzling 1.85 mbd during the same period in 2015. As a result, global oil supply averaged 96.38 mbd for the most recent quarter, versus 95.9 mbd for demand.

While the penetration of alternative vehicles is having only a modest impact on demand levels now, recent sales point to encouraging signs that they will increasingly displace oil. For Q3, in the U.S., roughly 45,000 plug-in electric vehicles were sold, up a robust 63 percent annually, making it the best quarter on record. Popular models included Tesla’s Model S and Model X, as well as the Chevrolet Volt. The six best-selling vehicles accounted for approximately 72 percent of total sales.

pev sales

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