Global oil market has changed the structure

Change of the global petroleum supply and demand structure that was caused by the shale revolution has been obvious this year.

Shale oil production increased especially in North America and influenced significantly on local crude oil prices. The U.S. Energy Information Administration chose Brent crude instead of domestic WTI for reference price in its long-term forecast report for the first time, since the domestic marker price has been far different from other international marker prices.

World petroleum demand exceeded supply during 2011 due to the supply disruption caused by the Arab Spring and the Libyan civil war, but the supply became excess in 2012. Although OPEC member countries reduced output in the later half of this year, average supply and demand balance in 2012 is estimated at 50,000 barrels per day of excess by the EIA.

Meanwhile, EIA forecasts 50,000 bpd of supply shortage in 2013. But OPEC and International Energy Agency still predict slight oversupply in the next year. (see the table)

OPEC and IEA do not give forecasts for total global petroleum supply figures. But we can calculate necessary OPEC crude oil by using their prediction on global demand and petroleum supply excluding OPEC crude.
According to both organizations' figures, needed OPEC crude oil supply in 2013 are estimated below the current production quota of 30 million bpd.

Latest estimation on OPEC crude production are between 30.5 million bpd and more than 31 million bpd. So, global petroleum supply could be excess if OPEC members do not continue to reduce supply further.
However, we have not seen less OPEC output than production quota for long. Therefore, global petroleum market is likely to be slight oversupply in 2013.

On the other hand, that oversupply is unlikely to move the crude oil prices.
Oversupply of 1.6 million bpd caused crude oil prices to sink to the lowest level in past 3 decades in 1998, while the market was supply shortage of 1.6 million bpd before crude oil prices reached the historical record in 2008.

The gap between global oil supply and demand in the next year is expected at about several tenth thousand bpd, and such small figures won't influence on the crude oil market.

Global petroleum supply was capped at around 85 million bpd in the later half of 2000's. The limit of traditional crude oil production seemed to be one of the reasons of crude oil price surge during 2007-2008.
The shale revolution has already removed the limit.

Since the shale revolution is also boosting natural gas production all over the world, the global consumption structure of fossil fuel is changing as well.

Crude oil prices are unlikely to be supported by supply factors in the future, except for severe supply disruption by the war or a case of significant environmental regulations against shale oil/gas development.

Introduction of strict regulation on energy production seems to be quite difficult, as offshore oilfield developments are still ongoing globally despite the shocking oil spill in the Gulf of Mexico in 2010. The shale revolution is unlikely to be retracted.

Economic recovery urges nuke plants resumption in Japan

Japanese utility firms ceased all nuclear power plants in June this year due to the anti-nuclear movements following the severe accident in Fukushima. Then Kansai Electric Power company has only restarted two units.

Most power companies got over the high-demand season during summer without nuclear units. Electricity demand in the KEPCO's service area during the summer season was also less than the supply capacity except for restarted nuclear plants.

These results encouraged anti-nuclear movements, but the stable power supply without nuclear units have been supported by not only the effort of power saving but also by the continued economy decline.

Year-on-year growth of Japan's industrial production shows decrease in most of the months in this year except for during March and May when figures are compared to the turmoil period after the severe earthquake. It is natural that the power demand in this year is also decreasing.
If Japanese economy continues to shrink further, electricity demand will also decrease and nuclear plants are no longer needed.

However, December's Monthly Economic Report by the Cabinet Office changed the overall economy outlook to "unchanged". The report had told downward revisions in the past four months.
Although exports and capital investments are still in weak tendency, individual consumption seems to show sign of recovery.
Easing monetary policy in order to exit from deflation is also expected to stimulate the Japanese economy, therefore, the risk of further economic recession seems to be relatively decreasing.

Current recovering energy usage in Japan seems to be reacting to the situation. Crude oil processing volume posted increase on year in the recent two weeks after the previous slump, according to the Petroleum Association of Japan. Electricity supply in November rose for the first time in the past three months, according the to the Federation of Electric Power Companies.

On the other hand, KEPCO's daily maximum power demand exceeded the supply capacity excluding nuclear plants in couple of days in December. It means that the company failed supplying enough electricity without nuclear units.

The insufficient supply capacity was caused by unexpected higher power demand due to the chilly weather besides maintenance shutdown at thermal power units. The company cannot do enough maintenance at thermal power plants if it keeps ceasing nuclear units.

Two giant utility firms Tokyo Electric Power Company and KEPCO kept power supply reserve rate at above 10% until summer season, but recently these figures often decline to single digit. Especially, TEPCO doesn't have enough capacity. If economic recovery will boost electricity demand, supply shortage is likely to occur.

Since Japanese electricity demand does not seem to surge by two digits numbers continuously even in the economic recovery period, utility firms could be able to keep enough power supply without nuclear units in the near term.

However, the continual stable power supply would definitely require further economic decline, if Japan does not prepare enough alternative power supply source such as new gas-burning thermal power units.

Is Chinese economy really recovering?

Recently, Chinese economic data show recovering. Since exports are still in slump, analysts describe that these positive changes have been led by the domestic demand.

HSBC's December manufacturing PMI was 50.9, the highest figure in the past 14 months. Industrial production in November posted the first two digits growth since March, according to the National Bureau of Statistics.

Energy consumption is also rising in step with the recovering economic data. Year-on-year growth of Chinese electricity output remained below 3% during the second and third quarter, but it rose to 6.4% in October and to 7.9% in November. It suggests revitalizing industrial activities.

Crude oil processing in China rose only 1.6% from a year ago during the first eight months in this year, but the growth rate increased to 7.0% in September and to 6.7% in October then to 9.1% in November.

Monthly petroleum products output tells us that surging gasoline and gas oil production suggest strong demand from the transportation sector.

Meanwhile, the balance between crude oil supply and processing apparently shows shortage of supply in the past couple of months. This means current increased crude oil processing in China is not a pre-planned activity.

Previously, monthly shortage was solved with averaging with previous and next months. However, recent consecutive shortage is likely reducing crude oil inventories in China.

Crude oil stocks excluding strategic reserve as of the end-October fell 3.5% from a month ago, according to Xinhua News. The inventory level seemed to decrease further in November.

Incidentally, the ample excess supply in the first half of this year was caused by the installation of 80 million barrels strategic reserve into the newly built facilities.

If domestic demand really leads economic recovery, China will have to import more crude oil to meet high processing. Import volumes in December and January may tell us the change.

On the other hand, Chinese government is scheduled to introduce a new petroleum consumption tax on 1st January 2013. The tax rate for fuel is 0.8 RMB per liter. Since current prices of regular gasoline are around 7.5 RMB per liter, pump prices will rise more than 10% after 1st January.

Rush demand before the enforcement of the new tax might be one of the reason of recent high petroleum demand. In that case, the demand is likely to shrink after January.

Does Asia really need US LNG export?

The United States government is considering to expand liquefied natural gas exports. North American natural gas prices have been in slump in the past couple of years due to the oversupply caused by the shale gas production.

Natural gas is globally oversupplied basically, while steady growth in China and the urgent need for thermal power due to nuclear power shortage in Japan make East Asian gas prices higher than other regions.
Increasing LNG supply from the US is likely to reduce Asian gas prices through arbitrage.

However, US LNG export won't surge immediately after the deregulation. Further LNG shipments require new gas-liquefy facilities and loading infrastructures as well as LNG carriers.

Long-term energy forecast recently provided by the Energy Information Administration predicts that the US natural gas import/export balance won't be export excess until 2020. Then gas export excess is expected to increase despite steady growth of domestic demand. US gas exports are forecasted to exceed imports 55 billion cubic meters in 2030, and exceed 95 bcf in 2040.

Natural gas prices in North America, that has been depressed by oversupply, are also expected to rise in line with the change of fundamentals. Protesters against the deregulation who afraid about higher domestic energy prices might be right.

On the other hand, even if the US increased its LNG exports, Japan may not buy a lot.
Why? As many people know, Japan has hiked LNG consumption for thermal power after the severe earthquake in March 2011 in order to make up for nuclear power shortage.

Japan's LNG imports in 2011 rose 12.2% from a year ago to 78.5 million tonnes, according to the customs data. Imports in the first ten months in this year increased 13% on year to 72.9 million tonnes. Total LNG imports in 2012 are seen to be around 87 million tonnes or 120 bcf.

Japan's LNG purchase, however, won't increase further in 2013. The country's existing LNG unloading and storage capacities won't allow to accept more imports. It's already reached to the physical ceiling.
Power saving, economic slump or resume of nuclear power plants are likely to reduce Japan's natural gas consumption in 2013 rather than increasing.

In Japan, annual 1 million tonnes of a new LNG import terminal is planned to be built in Fukushima prefecture by 2018. A 200,000 tonnes new storage facility is also planned to be installed in Hokkaido. But any other big concrete plans for LNG import infrastructure are not announced.

Meanwhile, China has been the biggest LNG consumer in Asia since 2009. Its growth of LNG demand in 2011 exceeded Japan even though the urgent demand for thermal power boosted Japan's gas consumption.

China's natural gas consumption in the first nine months 2012 rose 13.6% on year to 106.5 bcm, according to the National Development and Reform Commission. Total demand in 2012 is seen to be about 147.7 bcm. China's LNG imports in January-September surged 35.5% from a year ago to 30.5 bcm.

If China is able to continue economic growth as the government anticipated, the country's natural gas demand in 2015 is forecasted to reach to 230 bcm. But, China may not eager to look for fresh import contracts, since its gas supply capacity (domestic production and long-term import contracts) are predicted at 260 bcm in the same year.

Middle Eastern natural gas supply is also expected to increase firmly, so Asian natural gas market is likely to be already oversupply when the US will start shipping LNG to the region earnestly.

How much is global oil market oversupplied?

Global petroleum supply has exceeded demand since early this year, contrast to the shortage in the last year. Sluggish growth of demand while ample supply caused the situation. But how much is global petroleum market oversupplied at moment?

World balance of petroleum supply and demand was matched in 2009, but it turned to the shortage of supply due to the global economic recovery in 2010. Then, Libyan civil war suddenly stopped 1.6 million barrels per day of crude oil supply last year and led the global oil market to the significant shortage.

Urgent hike of output by producing countries made up for the shortage, and Libyan production has recovered quite faster than expected. Therefore, the decreasing crude oil supply from Iran by more than 1 million bpd due to the international sanction did not cause another shortage of supply in the global market.

The following table shows global balance of petroleum supply and demand based on data supplied by the U.S. Energy Information Administration, the Organization of Petroleum Exporting Countries and the International Energy Agency.

Except for EIA's estimate for 3Q 2012, that shows supply shortage due to steady demand, estimates and forecasts for 2012 and Q1 2013 are oversupply.
Meanwhile, EIA forecasts another round of oversupply in Q4 2012 and Q1 2013.

OPEC and IEA do not supply forecasts for OPEC member nations crude oil output yet. Relatively large minus figures in the balance cells in the table indicate necessary amount of OPEC crude oil supply in those periods.
Since recent crude oil output by OPEC is about 31 million bpd, that is much higher than the necessary volume, the supply shortage is unlikely to be seen until OPEC members decide to cut production significantly from the current level.

In the latest monthly report, OPEC has estimated October production by its 12 member countries at 30.95 million bpd and saw the world petroleum supply at 90.22 million bpd. IEA also estimated OPEC October crude oil output at 31.16 million bpd and assessed the world oil supply at 90.92 million bpd. Those numbers are all exceeding the demand forecasts for Q4.

On the other hand, Reuters earlier reported the survey result that OPEC crude oil output in November fell by 90,000 bpd from the previous month, and Bloomberg estimated the OPEC production declined by 330,000 bpd from a month ago.
Even if OPEC production decreases by 200,000 to 300,000 bpd from the October level, global balance of oil supply and demand estimated by OPEC or IEA still stays in oversupply.

It's true that recent volume of petroleum oversupply is shrinking compared to the first half of this year. The fact slightly confuses us. Why current crude oil prices are lower than the first half of this year? The market may have discounted the future slump of demand....