TST Oil Futures Trading System
Dynamic Drivers Forecast
Our Dynamic Drivers forecast for this week is a $.41 increase from $45.70 to $46.11. The main positive driver is the combination of the LTO Drilling Treadmill with no capital available from equity or bond issuance or bank loans ($1.20). This is exacerbated by the reserve resetting in Octoberexpected to require many smaller and medium size companies to repay $10 billion in bank loans within 60 days of the reset.
The main negative driver is the fill up rate for China’s new cities (-$1.99). The leading expert on the new cities is Wade Shepard who wrote the book “China’s Ghost Cities”. His thesis is that the Chinese government always knew that the “ghost cities” would require 15 to 20 years to fill up and that many are filling up. However, the actual speed of fill up has a huge impact on the Chinese economy because of its ripple effect on property values, new real estate investment and infrastructure, manufacturing, China’s GDP, and the wealth of China’s families whose wealth is tied to real estate. We project that the fill up rate is 3-4 years behind schedule and will fall further behind as China’s economy slows.
Dynamic Drivers Forecast
The main driver categories are macro/demand, Middle East geopolitics, and US shale oil production. The macro/demand drivers are China tables turned with US ($.80), US/China car sales ($.40), and China’s fill up rates for its new cities (%-1.99) for a total of -$.79. The Middle East geopolitics drivers are ISIS/Shia threat to Saudi oil infrastructure ($.80 ) and Iran Compliance (-$.80) for a wash ($0.00) and Fed rate increase which is priced in ($0.00). US shale production of LTO drilling treadmill with no capital is $1.20.
Dynamic Drivers Chart
The view below shows our Drivers + Consequences view. This view shows the consequences of the drivers relative to market expectations. E.g., the LTO Treadmill + Capital problem will lead to lower than expected production and a projected price increase of $1.20. The slower than expected fill up in the new cities will lead to a price decrease of $1.99.
Macro Drivers Analysis
China New Cities Fill Up Rates (-$1.99)
Yujaipu is a bellweather for China’s new cities. One reason is that it is in the central province of Henan. There is a huge disparity in terms of development, inventory and sales between the Tier 1 cities on the East Coast and the Tier 3 cities further west. We project that the aggregate fill up rate for the empty cities is 3-4 years longer than the Chinese government projects, unless the economy grows faster than our projections. The large property inventory has a tremendous ripple effect on the overall economy, because it impacts the need for investment and infrastructure and thus the need for steel and cement and other commodities manufcatured in China with large excess capacity. Real estate properties are also the most important source of wealth for Chinese family.
However, we also believe that the need to accelerate the absorption speed will motivate the Xi Jinping and the Chinese government to develop better trade relations with the U.S., the only economy capable of helping China’s increase its exports and keep its export-driven manufacturing industry in decent financial shape. Increased U.S. trade is the only short-medium-term catalyst to growing the China economy to increasing jobs to increasing wealth and increasing the number of people who can afford to buy property and thus bring the vast inventory into a reasonable vacancy rate.
The Chinese economy is hugely dependent on the U.S. Commerce Department figures show that, through the first 7 months of this year, China’s trade surplus against the United States is $202 billion. The surplus last year was $340 billion. The Chinese economy is becoming even more hooked on selling things to the United States because orders from the 27-nation European Union for Chinese goods have collapsed. This need will force Xi Jinping to adopt a more favorable approach to U.S. trade relations, as potentially evidenced by the new climate control and cyber agreements just announced during his trip to the U.S.
China + U.S. Auto Sales ($.40)
IHS Automotive reduced its forecast for light vehicle sales in China in 2015 by 3-4% from previous estimates. IHS reduced its full year 2015 light vehicle sales forecast to 23.4 million units, reflecting a growth rate over 2014 of just 1.4% compared with its previous forecast of 4.4%. Recent sales data — when combined with the slump in the Purchasing Manager’s Index, the currency devaluation in early August, and the summer stock market rout — suggests a significant rebound is unlikely in the coming months.
By contrast, the U.S. auto industry saw the strongest sales in a decade in August as U.S. consumers continued their exodus from cars into crossovers, sport-utility vehicles and pickup trucks. Fueled by low gas prices and high consumer confidence, the auto industry saw a seasonally adjusted rate that, if maintained all year, would amount to the sale of 17.8 million new cars and trucks, highest single-month rate since July, 2005, and up from 17.3 million vehicles for the same month last year, according to Autodata.
Middle East Geopolitical Drivers Analysis
ISIS/Shia Threat to Saudi Oil Infrastructure ($.80)
The risk to the Saudi oil infrastructure is increasing as ISIS adds attacks to Saudi mosques to previous ones of Shia mosques in the Eastern Province. The Iraqi oil infrastructure in the south is also at risk. The Gulf States, Iran and Iraq produced 73% of OPEC’s oil output as of July. Any meaningful disruption to this supply would cause a dramatic increase in oil prices since the world’s spare capacity is only around 2 million barrels per day.
The maps below illustrate that risk. The production by these countries in concentrated in fields in close proximity to each other.
These fields are particularly at risk of sectarian violence due to the conflicts between Saudi Arabia and Iran, Sunnis and Shia, and terrorist groups, such as ISIS, Al Quaeda, and Al Nusra, and government authorities. The risk to the all-important Saudi oil fields is exacerbated by their location in the Eastern Province of Saudi Arabia whose population is predominantly Shia and systematically repressed by the Sunni royal family that has absolute authority in governing the Kingdom. This problem is further exacerbated by the Wahabbi view of Islam that considers all Shia as apostates and infidels.
Iran Compliance Rush ($.80)
Early signs are that Iran is rushing to comply with its obligations under the Joint Comprehensive Plan of Action in order to have the sanctions lifted. Yukiya Amano, the director general of the IAEA, reported that the testing of the samples at Parchin, a key initial step, meets strict agency criteria that ensure “the integrity of the sampling process and the authenticity of the samples” even though IAEA experts were not physically present during the sampling. Amano’s visit to Iran also included meetings with President Hassan Rouhani, nuclear chief Ali Akbar Salehi and Foreign Minister Mohammad Javad Zarif. In those meetings, and with Iranian lawmakers, the IAEA said Amano discussed the U.N.’s investigation as well as the verification and implementation of the terms of the Joint Comprehensive Plan of Action.
Amano is due to deliver a final report on the IAEA investigation by December 15. Sanctions relief from the agreement with the U.S., Britain, China, France, Russia and Germany is contingent on Iran satisfying the U.N.’s questions about the allegations it worked to develop nuclear weapons.
US Shale Oil Production Driver Analysis
LTO Drilling Treadmill + No Capital ($1.20)
The table below summarizes the September 25th weekly petroleum report published by the EIA. It shows U.S. crude oil refinery inputs averaged 16.2 million barrels per day
during the week ending September 18, 2015, 310,000 barrels per day less than the previous week’s average. Refineries operated at 90.9% of their operable capacity; gasoline production increased, averaging over 9.5 million barrels per day. Distillate fuel production increased slightly, averaging 5.1 million barrels per day.
U.S. crude oil imports averaged 7.2 million bbl/d, down by 13,000 from the previous week. Over the last four weeks, crude imports averaged over 7.4 million bbl/d, 2.0% below the same four-week period last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 504,000 barrels per day. Distillate fuel imports averaged 164,000 bbl/dlast week.
Our analysis is that USA LTO/Shale production has peaked as a delay in completions matches rig count, which has been reduced by more than 50% during the past 9 months of declining oil prices. USA LTO/Shale oil and NGL liquids have peaked with ensuing natural decline rate upwards of 70% for wells brought online within past year. The overall impact on U.S. production will be to establish a new base decline approaching 20% per annum for all U.S. production as producers constrict budgets going forward. From a peak 5.5 million bbl/d of LTO/shale production, USA production will decline 100,000 bbl/d monthly or 1.2 million bbl/d over the next year as the LTO/ shale factory stalls due to low prices.
The EIA Weekly Highlights reflect a production decline of 459,000 bbl/d from June 26th.
We also project a major decline in worldwide production due to the decline in both conventional and unconventional production as a result of the following factors:
- Global conventional oilfield decline rates range from 4.5% – 6.7% per year.
- Decline rate is increasing with time as costlier and less productive fields are developed.
- Non OPEC fields decline faster than OPEC fields.
- Offshore fields decline much faster than onshore fields.
- Deepwater fields decline faster than shallow water fields.
- Unconventional fields decline much faster than conventional fields.
Swans Watch List
This week’s watch list is below. The watch list enables us to identify potential swans and determine the logical consequences of their occurrence. This prepares us to quickly update the Dynamic Drivers Model when we believe a driver should be added, modified or replaced.
Oil Price Drivers Database & Research Center
We use our Drivers Database and Research Center to update our Dynamic Drivers Model quickly and accurately. The Drivers Database has 100+ oil price drivers categorized by Tier 1 and Tier 2 categories. TST Oil Prices Organizational Framework The Research Center organizes all of our oil price-related scenarios based on the same categories.
TST General Purpose Platform
TST Oil Prices is a customization of the TST General Purpose Platform. See THINKSheet Is a General Purpose Platform for Building Professional Intelligence Systems for a description of the platform components. General Purpose Platform