I just left a closed-door meeting in Paris. Assembled here were some high-powered oil practitioners, the traders selling their productions, and the bankers financing all of it.
As often happens, the pundits and talking heads have been discussing matters quite similar to what was on our agenda. And as usual, their perspectives are very different from those of us "behind the scenes."
As a matter of fact, what I heard at this meeting has led me to believe that I may even have made a misjudgment.
For some time I have been talking in Oil & Energy Investor about a confluence of factors leading to a rise in oil prices. It was heartening to see I was right according to those assembled in my meeting – except for in the case of one interesting factor.
Never mind the noise coming from the cable news crowd. Here's what you need to know about what's really going on in the oil markets…
Have the U.S. and OPEC Destroyed the Supply-Demand Balance?
First, let's discuss what the pundits in the media have been getting wrong.
In the last two days, no fewer than four separate opinion pieces have appeared, all focusing our attention on the same point. About a year ago, each of these missives begins, a crude oil pricing collapse began. By the time it was over, prices had slid almost 60%.
The apparent culprit, according to this view, then and now, is a surplus of crude on the market. Each of these pieces then concludes that the problem is continuing.
Why? Because OPEC production is up, U.S. unconventional oil (read: shale and tight) remains too high, and there is a declining drain-off from refinery runs despite the reported rise in gasoline demand as we move into the primary driving season.
The translation being advanced is simple enough: The expected rebalancing of the crude oil market, in which supply and demand are equivalent and pricing changes are narrow, has not taken place because there remains too much supply on the market. In support of the argument, the pundits then turn to their two primary culprits.
The first is the decision by OPEC to initially keep production levels high and then to raise them even more in an almost frantic attempt to maintain market share. The second is the resilience of the American shale patch to continue extraction levels in the face of subdued prices for the product being lifted.
"It's the supply side, stupid," the commentators seem to be saying in unison.
However, the truly remarkable thing to recognize is that these same writers were touting that the rebalancing was in fact forming. And they had even proclaimed it had actually arrived early that week!
We Don't Need a Full-Blown Shortage for Rebalancing
So what happened?
Initially, they had to contend with the uncertainty of a Greek collapse in Europe and then with the uncertainty of what the Fed would say last Wednesday. Pundits, you see, hate uncertainty.
Then the weekly figures came in from the EIA (the Energy Information Administration, a division of the U.S. Department of Energy). They continued to show a drawdown and an absolute decline of almost 2 million barrels a day in American crude oil inventory. But not as large a decline in gasoline as anticipated.
That combined with a report earlier in the week that OPEC had produced 31.1 million barrels a day in May, a level higher than for any month since October 2012. This puts the cartel's production some 1.1 million barrels a day above its own monthly member quotas and 1.8 million barrels a day over its own estimates of the demand for its own oil.
Suddenly, the opinions were looking back a year – to the beginning of a pricing decline – and proclaiming the same supply problem existed this time around.
Now, what the "short-sightseers" want is an absolute contraction in American production totals, not simply a reduction in forward production rates. That is both unnecessary and a terrible way to calculate the actual base for prices. Nobody is expecting a shortage. We don't need one for the balance in the oil market.
Why My Price Estimates Weren't Optimistic Enough
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.