Oil Prices

TST Oil Price Systems

A Visual Collaboration System for Oil & Gas Professionals

NOTE:  To insure that new viewers appreciate that THINKSheet-based reports are shorter and more comprehensive, precise, dynamic and easier-to-understand than traditional research reports, we separate the introductory descriptions of how our TST Models work from the actual reports.  See TST Energy Systems for description of how the TST Oil Price models below work.  You can also see how Morgan Stanley separated its description of the THINKSheet methodology and value proposition from its research reports at  TST Equities Systems.

Part 1 – Forecast & New Drivers

Site Content – Part 1

EnergyOilPriceContentPart1

Forecast For September 2, 2015 WTI October 15 Expiration

Our forecast (as of 7 PM August 25th) for the October 15 expiration price on September 2 trade at 7 PM is $37.80, a decline of $1.05 from $38.85 for a 2.71% loss.  The overall forecast is based on a combination of the Fixed Drivers and Dynamic Drivers Model.  (Note: The Fixed Drivers Model and its integration with the Dynamic Drivers Model are proprietary and thus not shown.)  The Dynamic Drivers Model forecasts a larger -$2.56 loss from $38.85 to $36.29.  The positive driver for the Dynamic Drivers Model forecast of -$2.56 is US Car Sales ($1.35) and the most negative driver is China Slowdown to 2-4% (-$1.51).

PriceForecastWilly

New Drivers

Three new drivers that impact our forecast for our September 2, 2015 trade are: (1) increasing threats to China domestic stability, (2) global sell-off in stock markets, and (3) potential geopolitical changes among US, Russia, Iran and Saudi Arabia with respect to Syria and ISIS.

Increasing Threats to China Domestic Stability & Impact on CCP Policies

Across China, millions of workers and thousands of companies are feeling the pain of the country’s slowing economy, as sales slip and incomes drop.  For Xi Jinping and the Chinese leadership, domestic stability is the top priority.  It drives all other priorities, causing conflicts among the other priorities.  Signs of a broad-based economic slowdown have been evident for quite a while as Chinese workers faced with pay cuts and plant shutdowns staged several hundred protest in recent months.   To create more jobs to minimize unrest, the government will be strongly motivated to devalue the yuan to boost exports, increase spending for new infrastructure projects, and cut interest rates to stimulate the economy.   All of these steps potentially undermine its professed desire for structural reform in the economy and stock markets.

ChinaLaborUnrest 8262015

The risks to stability also extend to investment losses.  In the example below, a developer reduced prices for apartment units shortly after sales to the buyers who had bought a unit to live in others as investments.  The buyers rioted and the government had to bring in the troops to stem the riot.

China Protesters

Impact of Stock Market Declines on Global Animal Spirits

Stocks continued to fall as of close Tuesday on global growth fears, generating concerns about confidence in the three largest economies (China, EU, US) and the emerging markets dependent upon them.  The global market rout pummeled stocks and commodities as fresh evidence emerged in the Caixin PMI report released last Friday that China’s economy is slowing, spooking investors.  The Shanghai Composite dropped 244 points to close at 2,965; the Dow Jones Industrials lost 204 points to close at 15,666; the S&P 500 dropped 26 points to 1,868; and the Nasdaq Composite fell 20 points to points, to 4,506.  The Dow has declined 10.17% over the last month, with its largest intraday drop ever Monday of over 1,000 points.

ShanghaiComposite922015

DowJonesChart3

However, European markets finished sharply higher on Tuesday, after posting huge losses in the previous session, which has already being dubbed “Black Monday.”  The pan-European STOXX 600 accelerated gains towards the end of trade on Tuesday, provisionally closing higher by around 4.3 percent.  London’s benchmark FTSE 100 ended the day 3.2 percent higher, while France’s CAC  closed 4.4 percent up. Germany’s DAX was a top performer, finishing 5.3 percent higher.

Potential Geopolitical Surprises in the Middle East

As Congress gears up to debate the merits of the nuclear deal signed between Iran and the P5+1 powers last July, the Obama Administration is working overtime to get Mideast diplomacy off the ground to prove that the politically controversial deal will pave the way for a better Middle East. The effort, if successful, could have large implications for global oil markets.  In contrast to the aggressive public statements, there has been a flurry of activity among government leaders and diplomats from Russia, Syria, Iran, US and Saudi Arabia with respect to diplomatic solutions to Syria and ISIS.  There is at least a possibility that Saudi Arabia and Iran may conclude that they have such strong common interests in fighting ISIS and influencing oil production and prices that they may be forced to agree of solutions where their critical interests are aligned.

Part 2 – TST Models, Text & Chart

Site Content- Part 2

EnergyOilPricesSiteContentPart2

Price Forecast (QL+QT) Model

Our forecast (as of 7 PM August 25th) for the October 15 expiration price on September 2 trade at 7 PM is $37.80, a decline of -$1.05 from $38.85 for a 2.71% loss.  The overall forecast is based on a combination of the Fixed Drivers and Dynamic Drivers Model.  (Note: The Fixed Drivers Model and its integration with the Dynamic Drivers Model are proprietary and thus not shown.)  The Dynamic Drivers Model forecasts a larger -$2.56 loss from $38.85 to $36.29.  The positive driver for the Dynamic Drivers Model forecast of -$2.56 is US Car Sales ($1.35) and the most negative driver is China Slowdown to 2-4% (-$1.51).

PriceForecastWilly

NOTE: Our Fixed Drivers Model and its integration with the Dynamic Drivers Model are proprietary and thus not shown.  You can, however, see them in our live demos.

Fixed Drivers (QT) Summary

FixedDriversSummary922015

DynamicTimeSeries4

Dynamic Drivers (QL) Model

The Dynamic Drivers Model forecasts a larger -$2.56 loss from $38.85 to $36.29.  The positive driver for the  Dynamic Drivers Model forecast is US Car Sales ($1.35) and the most negative driver is China Slowdown to 2-4% (-$1.51).

DynamicDriversWill

Dynamic Drivers Analysis

Driver19215

U.S AUTO SALES CRUSHED EXPECTATIONS IN JULY. U.S auto sales blew past expectations in July helped by continued demand for trucks and SUVs. The big three — Fiat Chrysler, Ford and General Motors — all reported sales figures that trounced analyst expectations and marked best July since before recession.   In July, US auto sales hit a pace of 17.55 million units on a seasonally-adjusted basis, well above expectations for sales to come in at a pace of 17.2 million. Automakers are currently benefiting from the winning combination of an improving economy, lower gas prices and easy credit. They have seen increasing demand for trucks and SUVs, which have a higher margin. New car loans average a record 67 months (Experian) and the % of loans with 73 to 84 months reached a new high of 29.5% in Q1, up 25% yoy.

Driver2922015

FRIDAY CHINA MANUFACTURING DATA SPARKED GLOBAL SELL-OFF / LOWER LONGER HAS BECOME CONSENSUS. Caixin flash manufacturing PMI for August fell to 77-month low of 47.1 as economy slows. Lower cash availability from US capital markets for shale producers is positive but lower futures by speculators means more risk from change in sentiment. LOWER LONGER is sentiment in capital markets is in contrast to positive sentiment in 1H in which $44 billion in equity & debt raised. Also negative environment for repricing reserves in October reset for bank loans + regulators discouraging banks from lending to shale companies due to high risk.  Private equity firms have raised $24 billion in ’15 to place in energy firms and their risk tolerance is higher and their time horizon longer. Their terms are far more onerous than banks and capital markets in terms of interest rates, ownership % and covenants. Speculators are reducing long positions and increasing short positions.  Long positions totaled +241,712 contracts for a change of -9,435 contracts wow and short positions totaled +159,158 for a change of +8,143 contracts wow.

Driver3Bill

CHINA DROP CHANGES PROJECTED FED TIMING TO DECEMBER.   Weak economic data from China will probably change Fed timing for increasing rates from September to December. The dollar fell last week, extending its losses againt the euro.  However, the US economic data continues to be positive. Goldman Sachs’ strategists forecast substantial gains ahead, reiterating a call for the dollar to rise 20% in the next three years.   Mark Faber: “You have to look at the Chinese currency in the context of all other currencies, Faber told CNBC. “Over the last few years, the yuan has appreciated the dollar and the dollar has appreciated against just about anything in the world; the Chinese currency’s move is relatively small and appears justified. Also, the Fed looks at a different measure of the dollar than Wall Street. The Fed’s trade-weighted broad dollar index measures the greenback against the currencies of 26 economies according to the size of bilateral trade. China, Mexico and Canada make up 46 percent of the guage.

Drivers42015

IMF PARTICIPATION IN 3RD GREECE BAILOUT OPPOSED BY MANY MEMBERS.  The eurozone cleared €86 billion ($96 billion) in new bailout loans for Greece, sending the country a lifeline as it hurtles toward new political instability and a battle among its creditors over how to reduce its hulking debt.  Greece needs more significant debt relief from its creditors, the IMF said, after the bankrupt country accepted tough conditions to secure its third bailout deal in five years.  The first €26bn of the package has been disbursed.  Christine Lagarde said she will not commit the IMF to joining the latest bailout until the board has reviewed the agreement, probably in the autumn. Officials said they want to see more details about reforms, particularly to pensions, but the delay will also give European leaders time to consider their stance on debt relief.  Germany holds more Greek debt than any other eurozone country and has repeatedly rejected any “haircut” on what Athens owes, but is also keen to keep the IMF involved in the bailout.

Driver52015

SAUDIs, IRAN, IRAQ > PRODUCTION BUT YEMEN/ISIL RISK:  Saudi production decreased to 10.36 bpd in July from all time high of 10.56 bpd in June.  However, ISIS is a growing risk due to increasing attacks within the Kingdom, most recently on August 6th with a suicide bombing on police compound mosque.  To further destabilize the country, it is plausible that ISIS will attack its oil facilities —  like al Qaeda did in 2006 when it attacked the Abqaiq oil processing facility.  Iran is producing 2.8 million mbd now vs 3.6 mbd in late 2011 before sanctions. Iran’s ability to increase exports depends on the current condition of its oil fields and infrastructure. Its ambition is to ultimately increase its production to 5 mbd.  Iraq produced 4.18 mbd in July from 4.15 mbd in June (IEA) due to record Basra exports of 3.06 mpd, up 40,000 barrels from June.  However, there is uncertainty re its ability to sustain higher export levels, in light of infrastructure constraints in the southern terminals.

Driver62015

US PRODUCTION REMAINS AROUND 9.4 MILLION BARRELS PER DAY: EIA weekly report released on 8-19-15 for the week ending 8-14-15. US crude oil (CO) refinery inputs were 16.8 mbd, 254,000 bpd less wow @ 95.1% capacity. Gasoline production > slightly @ 10.2 mbd. Distillate fuel production 5.1 mbd. CO imports > 8 mbd, up 465,000 bpd wow. Over last 4 weeks, CO imports 7.6 mbd, 0.9% below mom. Total motor gasoline imports (including both finished gasoline and gasoline blending components) 869,000 bd. Distillate fuel imports 118,000 bd.  U.S. commercial CO inventories (excluding SPR) > by 2.6 mb wow to 456.2 mb. Total motor gasoline inventories 2.7 million barrels <.  Both finished gasoline inventories and blending components inventories <.  Distillate fuel inventories 3.0 mb < and  in middle of the average range for this time of year. Propane/propylene inventories  2.4 mb < well above upper limit of  average range. Total commercial petroleum inventories increased by 5.6 mb >.

Driver72015

China August Manufacturing Activity Hits Lowest Level Since 2009.  Caixin flash manufacturing PMI for August fell to 77-month low of 47.1 as economy slows. China’s leadership is preparing fresh fiscal spending & monetary easing to ensure that signs of economic weakening don’t put their 2015 growth target out of reach, a danger underscored by deterioration in manufacturing and exports.  Domestic and political stability is always first priority of Xi Jinping leadership.  Concerns about increasing labor unrest and unemployment, exports, and property and stock value have motivated Chinese government to increase fiscal and monetary stimulation and forced choice among conflicting agenas.  Bill Gross: “Weak Chinese economy seems to require a competitive devaluation against other Asian producers which points to weak global growth, lower commodity prices, and again, lower inflation worldwide.”  New fiscal spending for infrastructure to keep ’15 growth target; to finance, > govt debt swap program for local govts to cut borrowing costs; > lending capacity of policy banks  Must suspend attempts to rein in leverage; stock market equity raises no longer reducing corporate leverage.

Dynamic Drivers Chart

The bar chart below displays the relative price impact of each of the dynamic drivers.  We can see at a glance that the (1) most important positive drivers are the US Car Sales (demand) and (2) the most negative is China Slowdown (macro).

DynamicDriversChartBill 

Tier 1 Category Summary

Demand (US Car Sales) generates a $1.35 gain; Supply (US Production @ 9.4); Macro (China & EU) a -$2.11 loss; Geopolitics (ISIA, Saudis, Iran Iraq) a -$.60 loss; Dollar (Stronger) a -$.45 loss; and Financial (Bearish Financial Sentiment) a $.00 offset.

DynamicDriversCategoriesBill

Dynamic Drivers Categories – Time Series Chart

The time-series line chart below displays the impact of each driver category on the price over the past 4 weeks.  Everyone can see at a glance that the Macro category has driven the price down $4.88 while Demand has driven it up by $1.65.

DynamicTimeSeries2

 

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