Ahead of the OPEC meeting…
As Iran continues to grow…
Oilprice.com sat down with the President and founder of CornerStone Analytics Mike Rothman to discuss the current state of the global oil sector, with a focus on key points such as:
• The likelihood of positive action being taken by OPEC at its June meeting
• Why Russia is so resistant to production cuts
• The “Missing Oil” Phenomenon
• The short to medium term outlook for US crude production and supply/demand equilibrium
• What has driven the oil glut in the United States
• At what potential WTI price the US might resume production growth
• What could potentially thwart a rise to $80 Brent
• The relationship between the US dollar and the international oil price
• Why Peak Oil has fallen off the media radar
Oilprice.com: Mike firstly can you tell our readers a little about your firm and background?
Mike Rothman: Sure. We are an independent firm that focuses on macro energy research geared towards institutional investors and industry professionals. I’ve followed the global energy markets for the past 31 years and have been attending OPEC meetings since 1986.
Oilprice.com: Can you provide your current thoughts on the June OPEC meeting and whether members and non-members (including the likes of Mexico, for example) will sign on to production cuts?
Mike Rothman: It’s too soon to call the June meeting, but our outlook for the global oil balance suggests that the cartel will not need to cut production given what looks like a sharp increase in oil market requirements during the 2nd half of the year.
Oilprice.com: Why does Russia seem to resist cutting production when it appears to be the stumbling block in getting Saudis and rest of OPEC to reduce output?
Mike Rothman: Russia’s relationship with OPEC and Saudi Arabia, in particular, is actually quite poor. It was evident in the ‘80s and remains apparent. There are no widely held expectations (nor should there be) that Russia will help OPEC balance the oil market.
Oilprice.com: In light of your thoughts there, you have maintained that the call on OPEC is much greater than perceived in 2H, tied to demand underestimation via “Missing Oil”. Can you explain why this can exist when the consensus seems to be to ignore it?
Mike Rothman: The general issue is that emerging markets oil demand tends to be chronically under-estimated. Missing oil refers to situations where the consensus estimate for demand is simply too low. Related: The Real History Of Fracking
Oilprice.com: Further, do you think estimates for a 500,000 rise in US production are accurate in 2015 with sequential quarterly declines into 4Q and possibly 2016?
Mike Rothman: The “math” relating to average US production this year versus 2014’s average do point to a gain of about that magnitude, but what is actually more important is the prospect that US oil production growth tops out, especially given widely held views that output would grow by 1.0 million b/d each year for many more years to come.
Oilprice.com: The market seems more focused on short-term supply/inventory issues so when and why would they care about the “Missing Oil” issue?
Mike Rothman: I would focus this down further and suggest that you have many market watchers focused only on US crude oil inventories. Global oil stocks did build during the 1Q 2015 period, but actually not by as much as forecast. Importantly, the build we estimate for the just-ended quarter will be wiped out during the early part of the 2nd half of the year.
Oilprice.com: For North America when do you believe supply/demand balance will occur?
Mike Rothman: This question is a little more complex than not, so to best help the audience, it’s important to remember that the US is currently the world’s largest net importer of crude. Looking forward, it will remain a large net oil importer. We currently produce about 9.4 million b/d of crude and refineries “consume”, on average, about 15.5 million b/d.
Oilprice.com: On the refinery front, do you agree with the notion that a significant reason for the 2015 build is not only tied to oil production but the lack of light oil refinery capacity? How and when do you see getting this resolved?
Mike Rothman: No, I don’t see it that way. Stocks built in the 1Q 2015 period because OPEC and non-OPEC production exceeded global demand by a little under 500,000 b/d. Related: How Much Longer Can OPEC Hold Out?
Oilprice.com: The forward curve has flattened significantly. Some say it’s tied to the market beginning to forecast more balance in 2H15 and others say it’s the Iran overhang as well as non-completed wells in the US that potentially can add to output. Why shouldn’t prices rise and flatten since the US is flush with so much perceived oil supply?
Mike Rothman: In general, prices rallying and the curve flattening is a normal pattern, but what I should note is that the rate of change in the shape of the price curve suggests there is some increased underlying bullishness about the outlook.
Oilprice.com: At what WTI price level (deemed price normalization) do you believe US will begin resume production growth?
Mike Rothman: I don’t think this is clear, actually. What we see happening in the US upstream business is the peak in production occurring this year as opposed to what we had been forecasting – which was a peak in 2017. An expected rebound in oil prices does not look to us like it will produce a commensurate rebound in US production growth.
Oilprice.com: Investors believe we are in a secular bear market for energy tied to the strong and rising dollar. Even if we reach supply/demand balance isn’t this going to thwart a rise back to $80 Brent? Isn’t a view of bullish oil tied to essentially a resumption of QE from the Fed?
Mike Rothman: A look at the long term relationship between crude oil prices and the greenback shows changes to be generally un-correlated. The phenomenon of the Dollar trading in lock-step with crude started in 2007 when the sub-prime markets became toxic. Since 2007, though, it is clear that this relationship tends to be an on-again/off-again affair. Related: Huge 100 Billion Barrel Oil Discovery Near London
Oilprice.com: Has the market lost sight of “peak oil” in light of this down turn and that fact that rises in production outside the US really haven’t been significant while in some cases production has significantly declined?
Mike Rothman: “Peak oil” is a convenient way of trying to convey the issue of non-OPEC production growth having been so challenged. In point of fact, the generally lackluster growth we’ve seen in non-OPEC output since the CAPEX cycle inflected 12 years ago remains a bullish factor for oil prices over the medium term. Importantly, global oil demand growth has significantly outrun additions to non-OPEC supply which, in turn, is a key reason OPEC’s spare production capacity has been whittled down so dramatically.
Interview By Leonard Brecken for Oilprice.com
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Leonard is a former portfolio manager and principal at Brecken Capital LLC, a hedge fund focused on domestic equities. You can reach Leonard on Twitter.