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DISCUSSION THREAD: Episode 29 - Art Berman

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2 years 4 months ago #1 by amkc
Always great to have Art Berman back on the program. He was the first interview I'd ever heard on MacroVoices and remains one of my favorite guests to date. Apart from his no-nonsense analysis, the chart book is a excellent compliment to his analysis. Oil isn't my specialty but viewing inventory numbers from a comparative perspective reminds me of some of the best charts I've seen comparing equity indices across different years. For our American listeners, enjoy your Labor Day Weekend!

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2 years 4 months ago #2 by Pepe le Moko

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2 years 4 months ago #3 by amkc
@Pepe le moko
This is the link that comes up for me in the Research Roundup email: www.macrovoices.com/podcasts/MacroVoices...09-01-Art-Berman.mp3

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2 years 4 months ago - 2 years 4 months ago #4 by Pepe le Moko
Replied by Pepe le Moko on topic DISCUSSION THREAD: Episode 29 - Art Berman
Let's talk about argument. Not like two people being angry at each other, but like two lawyers in court trying to convince a jury. More like debate but the stakes are higher. Pretty much by definition this is about persuasion. Your job as a polished debater is to "sell" your point of view to someone. This could be a jury or a customer or just a guy reading an article about peak oil. Obviously different audiences respond differently to different types of arguments. A skillful debater will scope out his audience first and figure out what will motivate them. On this web site the assumption is that the average reader is financially sophisticated and engaged. They can read a chart and like talking about and thinking about complex economic concepts. In general we have become used to reading charts and graphs and are fairly comfortable with arguments that don't stress high school level math skills. I was just watching Maciej Ceglowski speak about web design. He mentions in passing that it is odd that Google uses an integral in it's page load time metric because it is too abstruse for their audience ( in addition to being unnecessary).

I get irritated when I hear Mr. Berman kind of waving his hands around and saing there is some complicated relationship between GDP/Labor/Capital and therefore oil will go way up and then way down.
(I'm going to take a minute and interject that I give the man plenty of slack. He can be wrong quite a bit before I change my opinion. Babe Ruth only hit the ball one third of the time. Handicapping oil prices is much harder than baseball.)
It is too bad because I really like Mr. Berman and think that he might be right. His argument however is not persuasive. It needs rigor and ... something else. He needs a Model. What is a Model and why is it important? Mathematical modeling is a form of argument that appeals to Scientists and Engineers ( and of course Financial minds). It provides a justification and serves to highlight the assumptions that are being made in ( for instance) an UP-then-DOWN kind of prediction. A good model can be back-tested and played with and in principle you can develop trust that the model correctly describes reality. This whole idea seems kind of mysterious to most people but to a physicist or an economist this is hands down the ONLY real way to prove your point. Today there is a computer in on every desk and a cell phone in every pocket. Making models is easy and cheap. Do you want to mess with a model but don't want to install lots of software on your machine? You can try one of the more famous ones here:

Why doesn't Gail Tverberg ( just as an example. I'm not calling her out in particular ) use models to describe what she thinks is going on in the world ? Ms. Tverberg is an Actuary. She makes models for a living. I'm going to assume that she did indeed make a model to describe peak oil and the economy ( possible the world3 model. She has written about it in the past) but that the output of the model was not what she expected.

I submit to you that the reason we are not seeing models ( even simple ones like excel spreadsheets) is that they don't support the narrative of peak oil. What if the issue we are having is not peak oil so much as something wrong with the fundamental basis of the economy?
Last edit: 2 years 4 months ago by Pepe le Moko.

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2 years 4 months ago #5 by theinfidel
Replied by theinfidel on topic DISCUSSION THREAD: Episode 29 - Art Berman
Art Berman is having a hard time reconciling the fact that consumption isn't picking up when oil gets down to X (the price where he believes consumption should pick up). Perhaps Art lives in a different world than the typical consumer, who is financially stretched to the limit even at $2.00 per gallon. Perhaps that accounts for the builds during "driving season" is that people can't afford to go on vacations. Time to readjust the model, Art, and maybe talk to Joe and Jane 6-pack to get an understanding of what's happening in the real world.

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2 years 4 months ago #6 by jefflee
Replied by jefflee on topic DISCUSSION THREAD: Episode 29 - Art Berman
Eric- interesting interview with Art. Do you know how he calculates comparative inventory values on his chart? It seems to be more than just a simple moving average but he didn't quite get into the calculation. Would make it easier to understand the values since he puts so much weight in the numbers versus just the absolute inventory numbers. Thank you and enjoy the Labor Day weekend.

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2 years 4 months ago #7 by thorjac
Replied by thorjac on topic DISCUSSION THREAD: Episode 29 - Art Berman
On Thanksgiving day 2014 the oil market changed and the big drop started. Those of us in the oil
business have been through many down cycles in the past, and we got prepared for a rough ride.
None of my colleagues thought that prices would go as low as they did in January 2016. We also did
not think the downturn would last as long at it has.

There is a lot we did not - and still don't know about oil markets, and we make our living drilling for oil.
What we do know, is that demand is rising at over 1,000,000 bbls of oil per day for all of 2016. That's
a yearly increase in demand of over 365,000,000 bbls of oil. Next year, and the next..... will see an
increase in demand of a similar amount.

That relentless increase in demand is going to catch up to the markets in time. And, timing is always
the hardest thing to pin down. But, my feeling is that the realization of tightening oil markets will be a
sudden event. A surprise increase in domestic production, a massive inventory draw or demand increase
surprising to the upside. I am not counting on OPEC, war or politics to move the oil markets.

It's the demand that will ultimately take over the headlines. If we could put in a time capsule our predictions
of oil prices in five years - we would probably be wrong. If we put in that time capsule what we thought
would happen to oil demand in five years - we would be spot on. We know how much we will be using
in the world in five years. We don't have enough oil production to handle the coming increase in demand.
And further more - "We Can't Handle the Truth" about demand. So, we don't tall about it. Until we have to.

Something will happen to make us talk about demand..... and supply.

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2 years 4 months ago #8 by Pepe le Moko

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2 years 4 months ago #9 by Pepe le Moko
Replied by Pepe le Moko on topic DISCUSSION THREAD: Episode 29 - Art Berman

Oil investment crashes to 60-year low, incubating next energy shock

Investment in North Sea oil and gas has collapsed eightfold

Ambrose Evans-Pritchard, International Business Editor

14 September 2016 • 12:01am

Oil discoveries have slumped to the lowest level since 1952 and the global economy is becoming dangerously reliant on crude supply from political hotspots, the world’s energy watchdog has warned.

Annual investment in oil and gas projects has fallen from $780bn to $450bn over the last two years in an unprecedented collapse, and there is no sign yet of a recovery next year.

The International Energy Agency said wells are depleting at an average rate of 9pc annually. Drillers are not finding enough oil to replace these barrels, preparing the ground for an oil price spike in the future and raising serious questions about energy security.
Fossel investment

“There is evidence that cuts in exploration activities have already resulted in a dramatic decline in new oil discoveries, dropping to levels not seen in the last 60 years,” said the IEA’s World Energy Investment 2016 report.

The drop is so drastic that the effects are likely to overwhelm slow gains from fuel efficiency and the switch to electric cars, at least for the rest of this decade.
Electric cars

Much of the steepest fall in spending is in stable political areas. Britain’s North Sea investment has shrivelled to £1bn from an average of £8bn over the last five years. Spending in Canadian fields has plummeted by 62pc.

This decline tightens the future stranglehold of the OPEC cartel and Russia on global oil supplies, although the consequences will not be obvious until it is too late. The big national oil companies in the Gulf have costs of $10 a barrel or less, and most have kept up investment.

Saudi Arabia seems determined to keep raising output and push for market share, even though low prices caused by its own policy are playing havoc with its public finances. The budget deficit is 16pc of GDP.

It is drawing down foreign exchange reserves and tapping the global bond markets to makes end meet, a high-risk strategy but one that can probably work for another two years.
oil pump
The sun appears to be setting on plentiful oil supplies Credit: Alamy

Russia’s oil industry has higher costs but it has been cushioned by a cheaper ruble. The Kremlin has an Achilles Heel, however. It is is burning through its Reserve Fund to cover a fiscal deficit, drawing down $6bn in August alone.

There is only $32bn left. Russia can probably muddle through until mid-2017 but then it will face stark choices. The Saudis may calculate that they can outlast Russia in this grueling war of attrition.

The IEA said global spare capacity is wafer-thin at just 1.7m barrels a day (b/d), stripping out idle capacity in the war-torn trio of Libya, Iraq, and Nigeria. This implies that the market will swing from glut to scarcity with lightning speed once the energy cycle turns.

For now the world is still swimming in oil, and iron law of the oil cycle is that the longer this goes on, the greater the rise in crude prices later. Brent contracts have slipped 6pc to $47 a barrel over the last three trading sessions, giving up the short-lived gains from vague talk of an output freeze by OPEC and Russia later this month.

The IEA said the oil market is behaving strangely. “With the price of oil at current levels, one would expect supply to contract and demand to grow strongly. However, the opposite now seems to be happening,” it said.
Nigeria oil
Nigeria's oil industry faces instability on a regular basis Credit: AFP/GETTY

Growth in global demand slumped to a two-year low of 800,000 b/d in the third quarter, upsetting the fine calculus of supply and demand. The glut is now likely to persist until mid-2017, and this will be extremely painful for Nigeria, Algeria, Angola, Venezuela, and Iraq.

OPEC is still adding supply into a depressed global market. Both Iran and Saudi Arabia and have added 1m b/d each over the last two years, more than offsetting the 1.4m b/d fall in other parts of the world.

The Iranians have lifted exports more quickly than expected to their pre-sanctions level of 2.2m b/d, though output has leveled off over the last four months . It is clear that this one-off effect is largely exhausted.

The Saudis have ramped up their giant Wasit gas plant, freeing 215,000 b/d of output that was being used for power. But the bigger picture is that the Kingdom is sticking to its master plan to kill off high-cost projects in the Arctic, in African deep waters, in the Canadian oil sands, and Venezuela’s Orinoco basin.

Saudi Arabia has largely given up trying to knock out the US shale industry, reluctantly accepting that it will have to live with this troublesome upstart. North America’s frackers are becoming low-cost producers and are tough opponents, able to survive and thrive at $40 to $50 a barrel due to leaps in technology.
arctic oil
Saudi Arabia looks to be sticking to its plan of killing off high cost oil projetcs, such as those in the arctic

Although 90 companies have gone bankrupt since oil prices crashed, this has not stopped the juggernaut. Some have done deals with creditors, clearing debts. In other cases, private equity groups with deep pockets have scooped up the distressed assets.

Frackers have added 98 new rigs since May. The epicentre of fresh output is in the Permian basin of West Texas, a region that could ultimately produce 6m b/d and surpass Saudi Arabia’s Ghawar field.

The IEA said costs for shale drillers fell 30pc in 2015, and will fall a further 22pc this year. The price of completing a well has dropped by up to 65pc since 2014.
Revenue declines

Lower costs are not confined to fracking. Spot day-rates for land rigs globally have dropped from $25,000 to $16,000. Drill ships for deepwater fields have fallen from $650,000 to $400,000 a day. This means that the actual damage from falling investment is not as bad as it looks, but it is still serious.

The great question is how quickly the industry can crank up output once the market tightens. Shale drillers are nimble, but even they need one to two years to recruit expert staff, and reach full momentum, and they are not big enough to make up for cancelled mega-projects across the world.

The Saudis may ultimately win their gamble, flushing out rivals so thoroughly in a three-year purge that the ground is prepared for an unstoppable surge in crude prices later this decade.

But if that reminds the world that oil is a highly volatile commodity controlled by political cartels, it may trigger the final and definitive push for home-grown renewable energy. Such are Pyrrhic victories.

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2 years 1 month ago #10 by fconrad
Replied by fconrad on topic DISCUSSION THREAD: Episode 29 - Art Berman
Hi Aaron and Erik, I'm recent to MacroVoices and cannot thank you or encourage you enough for your work. It's a necessary and exemplary service in this day and age.

I have a question regarding the 26 February podcast with Art Berman where Art infers that if capacity utilisation for Cushing and Padd 3 are at 80% this will place a ceiling on oil prices. Currently they are at 79% and 63% respectively. I hope I'm reading this right in referencing 'Tank Capacity Utilisation Rate' (Cushing) and 'Refinery Storage Capacity Utilisation" (Padd 3). (see attachment www.eia.gov/petroleum/storagecapacity/storagecapacity.pdf )

My first question is am I reading the data correctly? and secondly is the 80% threshold still relevant today?

Thank you so much for your time.


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2 years 3 weeks ago #11 by ErikTownsend
Replied by ErikTownsend on topic DISCUSSION THREAD: Episode 29 - Art Berman
Hi Faris,

In later podcasts, Art has opined that the 80% threshold, while relevant in the past, seems not to be as important these days. We speculate the reason is increased pipeline capacity out of Cushing.

I suggest listening to Art's more recent interviews here, then go to his blog at www.artberman.com and post any further detailed questions there.


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