1

Week Commencing August 04, 2014

22

This week we look at the following topics:•Global energy market•Oil production out of the USA•Does the US need to import oil?•Global demand for oil is growing

33

One of the biggest issues in the oil market out there is the emergence of the United States (USA) as a major producer of oil and other energy sources. This has often been a reason for energy bears to argue that oil prices will come down and dependence on foreign sources of energy is reducing in the United States. While some of this is correct, we feel that it is a one sided argument and does not reflect what is happening outside of the USA.

The USA reaping the benefits of opening up its various sources of energy and promoting the exploration of previously unconventional shale gas. The USA has always been a major source of energy, the amount of energy production though has been a function of economic strength and also the cost of importing where appropriate. As global energy prices have risen, more and more exploration has resulted in an overall increase in total energy production in the USA.

44

USA becomes largest producer of oil – true

There are a lot of news headlines out there that would lead you to believe that the United States is now the most important producer of oil. For example:

* Tanker of Texas Oil Heading to South Korea in First Sale Since 1970s Embargo: According to this article in the Wall Street Journal, domestic oil production had been declining and exporting oil wasn't a hot issue until recently. All that changed as new techniques for tapping oil from shale formations have sparked an oil boom in Texas, North Dakota and elsewhere. Since the end of 2011, U.S. oil production has jumped by about 48%, to about 8.4 million barrels a day, according federal data.

55

This is true. Some estimates have current US oil production at an annualised rate above that of Saudi Arabia making the US the largest single producer of oil globally. From BP’s annual statistical review for 2013 published a few months, we can see that last year the US was only slightly behind Saudi Arabia in terms of overall production. If you would like to open the full document, click the link here.

66

The US is estimated to have increased its annualised rate of production from around 10 million barrels of oil daily to above 11.5 million over the past few months. This should show up in next year’s BP review. In isolation, it is a truly amazing process considering where US production was just over a decade ago. In 2004 when the world economy was heating up and the housing boom in the US was starting to ramp up, the country only produced just over 7 million barrels of oil equivalent. The high oil price, freeing up of legislation and strong entrepreneur-type culture of the US economy has seen investment into new production drive these numbers higher.

You’ll hear this part only in the mainstream media and among some traders. They stop here and draw a conclusion that because of the headlines which we showed above and the true statistical fact that the US is now larger than Saudi Arabia, oil prices must somehow be justified in coming down. To have a full balanced argument, we need to address also the issues below.

77

USA doesn’t need to import oil – false

It would be easy to draw this conclusion from the above – US not the largest producer, ships loading on US shores and heading from South Korea…that should mean the US doesn’t require oil imports right? False. One of the important facts to consider is that the US might have become the largest producer of oil but it is still the single largest consumer of oil. In 2013, the US produced around 10 million barrels of oil per day but it consumed just under 19 million barrels of oil per day. The rate of consumption was a lot lower than ten years ago, we can make that admission. In 2004 the US was consuming around 20.7 million barrels of oil per day. The chart below shows the decline of US oil consumption over the sample period provided by the BP report mentioned above.

Haven’t you heard somewhere that the US is on its way to becoming a net exporter of energy? Sure, this is also factually possible but it includes other sources of energy including natural gas. The US however is nowhere near becoming a net exporter of oil. This is a large distinction to make. The US will still need to import oil until its production and consumption hit equilibrium. To put things into perspective, if the US wanted to become a net exporter of oil today, it would either have to double its production or halve its consumption!

88

Global demand for oil is growing – true

The US is important but it is not the only important part of the oil puzzle. The emergence of China, India and other non OECD nations is the real driving force for oil consumption over the next few decades. The US and the rest of the developed world will through technology reduce their consumption per capita and increase their production of oil but the emerging world is still crucially hungry for as much oil consumption as it can get. This balancing off will take time but is prone to shocks. Let us illustrate again from the BP statistics below. The chart below shows consumption of oil.

99

Note the three big factors in the above chart – China is now consuming as much oil as the US is producing, India is starting to increase its consumption while still about a decade behind China in terms of its development growth rate and the overall consumption of Non-OECD nations firmed by 3.1% last year compared to a 0.4% fall in consumption among OECD nations. In a nutshell, the fall in consumption in developed nations through technology is not enough to offset the growth in the developed world. The tables above show this.

The European Union’s numbers fell last year also, no doubt impacted by the sovereign debt crisis, but with a strong ECB commitment to pump the system with cash, we could very well see the European Union increasing its consumption in 2014 back towards the 13-14 million barrel of oil equivalent level which would see even more growth in global consumption. Germany is still the world’s fourth largest economy and an industrial powerhouse which benefits from a weaker Euro. These are the hard hitting facts.

1010

Global supply of oil is growing enough – false

This is the last point which we will touch on for this week. The purpose is really to get you thinking about the facts and not just the newspaper headlines that can distort the view of an energy trader. Being with the facts is very crucial, particularly at a time when the Brent crude prices is falling back towards US$100 per barrel after failing to break through US$115, something we touched on in our prior report here. It would be easy to believe that with the growth in energy production in the US over the past few years, the amount of oil available for global consumption and anticipated growth in non-OECD nations would also be rising. This is false, as highlighted by the numbers below.

In 2013, global oil production grew by only 0.6% if we assume every country that reported the numbers to BP was telling the truth. We have to make that assumption in order to remain consistent. A 0.6% growth rate in total consumption is still not enough to counter the total global growth rate of 1.4% and as the chart above shows, OPEC countries actually reported a 1.8% decline in oil production. OPEC is one of the most crucial parts of the overall oil supply pie.

As the numbers above show, OPEC has been the only consistent producer of oil when excluding non-OECD nations. The largest growth in oil production has come from non-OECD countries but they are the hungriest for consumption and their rate of growth actually went backwards in 2013 – perhaps signally a capping out in their rate of production capacity.

1111

Chart to contemplate

The chart below shows consumption per capita and highlights the looming global problem facing energy markets. The largest consumers per capita are also the largest suppliers – North America and Saudi Arabia. But what happens when the fastest growing economies in the world – the Asian region, starts to increase its consumption per capita from very low levels are highlighted in this chart? Obviously huge upward pressure on the demand for oil.

1212

Energy Market Outlook Webinar

Volatility across the energy markets has been quite high with tensions in the Middle East and Ukraine concerning many analysts. Join Peter Esho, regular contributor on CNBC, Bloomberg and host of ‘Your Money Your Call’, as he outlines:

•How the impact of the Middle East problems will impact oil supply•True or False? What’s happening in the USA energy market•Alternative energy options, what you need to know•How to trade the energy markets today

Peter’s webinar will cover both the fundamental and technical outlook going forward plus the key drivers to look out for. Spaces are limited and this webinar is expected to fill fast. Q&A will be open straight after the webinar. Register now by visiting http://www.invast.com.au/webinars

1313

Go to www.invast.com.au/insights to get a complimentary 4 week trial and receive the latest insights as they are published to our live clients.

1414

DisclaimerPlease note that you are receiving this report complimentary from Invast Financial Services Pty Ltd (AFSL 438 283). Invast staff members may from time to time purchase securities which are included in this or future reports. The authors of this report may or may not be holding a position in the securities mentioned. Please note that the information contained in this report and Invast's website is of a general nature only, and does not take into account your personal circumstances, financial situation or needs. You are strongly recommended to seek professional advice before opening an account with us.

General Disclaimer: This newsletter contains confidential information and is intended only for the person who downloaded it. You should not disseminate, distribute or copy this newsletter. Invast does not accept liability for any errors or omissions in the contents of this newsletter which arise as a result of downloading this newsletter. This newsletter is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell any financial product. Invast Financial Services Pty Ltd is regulated by ASIC (AFSL 438 283 | ABN 48 162 400 035).

1515

Risk Warning: It's important for you to read and consider the relevant Product Disclosure Statement, and any other relevant Invast Financial Services Pty Ltd documents before you decide whether or not to acquire any financial products listed in this email. Our Financial Services Guide contains details of our fees and charges. All these documents are available here on our website, or you can call us on +612 8036 7555. CFDs and Foreign Exchange are leveraged products and carry a high level of risk and you can lose more than your initial deposit so you should ensure CFD and Foreign Exchange trading meets your personal circumstances.

General Advice Warning: Being general advice, this newsletter does not take account of your objectives, financial situation or needs. Before acting on this general advice you should therefore consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision.

16

https://www.youtube.com/user/InvastInsights https://www.facebook.com/invastglobal