Brent Faces 2014 Headwinds

EconMatters | Jan 16, 2014 02:21PM ET

EIA Petroleum Report

In reviewing the EIA weekly petroleum report, the oil imports figure came in at 6.889 (Million Barrels per Day) for the week ending 01/10/14. This number compared to a year ago 8.030 (Million Barrels per Day) puts a nice cap on the downtrend which really started gaining steam in 2010 onward.

Compare this imports number with the U.S. Production number of 8.159 (Million Barrels per Day) and it is clear that oil is being managed quite effectively to keep supplies and prices in check. A year ago U.S. Production was 7.041 (Million Barrels per Day), and so the goal is to try and offset imports to the increases in U.S. Production by importing less oil.

You don`t think this spread exists solely due to natural supply dynamics of the underlying products do you? There are vested interests and stakeholders at play here; the spread is encouraged because it meets the needs of many stakeholders on both sides of the pond so to speak.

Where is Supply Really Going?

It is obvious that a lot of this oil is just staying in the ground; some of it is probably being stored in China on a resource play as they build up their reserves.

But at some point reserves fill up, and these Middle East countries need more and more revenue to meet their expanding budget commitments. Therefore, holding back production to artificially manage global prices by limiting supply works for a while but eventually these same producers are going to need to start producing more to meet the expanding revenue requirements, especially if price is unable to compensate substantially for much lower production volumes.

Consequently, when this happens the world could experience its first real meaningful break in oil prices in the last 10 years (apart from the financial crisis temporary drop) even with a slightly improving global economy.

Final Thoughts

The three contributing factors would be the dynamics of the North American Oil Production market, the ending of QE Stimulus, and the eventual increased production from the Middle East (both in terms of New Oil coming onto the market & the increases in existing supply to meet revenue objectives which is currently being purposefully withheld from the market).

It may take towards 2015 for this to all play out, and with more fuel efficient vehicles in the developed world, and China already struggling with pollution overload ( the last thing they can handle is more cars on the road), it makes intuitive sense that at some point the fundamentals are going to dictate a lower oil price.

Furthermore, one would think that Brent comes under increased pressure in 2014; and accordingly it would seem that any rally in Brent should offer up a nice entry point on establishing a short position in the commodity.

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Written By: EconMatters

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