OP: The IEA just came out with their monthly report recently. The headline-grabbing sentence that they had in there was that oil markets might “drown” in over-supply due to rising inventories. Do you see storage levels, rising storage levels, being a big problem in 2016?
CL: I do. I think that there is definitely concern about storage outside of the U.S. as storage outside of the U.S. is limited. Most countries that do have storage are using it mainly for reserves outside of the [Amsterdam-Rotterdam-Antwerp] area in Europe. So there is a lack of storage and it is something that a lot of companies are looking to build out, and even countries are looking to build out, but that’s not going to be solvable until 2017 anyways. But that could be an issue. Even though that oil has value, it has no value unless it can go somewhere, whether that’s to a consumer or storage. Neither is looking good right now.
OP: Does that open up the possibility of floating storage?
CL: It does open up the possibility of floating storage. We have seen Iran do it. Now that Iran is going to lighten those loads and hopefully dismiss those tankers, there are going to be a few extra tankers on the market, rather than just thinking of it as a lot more crude on the market. So that’s definitely a possibility. I think the U.S., though, is still in a position where if they wanted to increase their storage we could see a lot of that open up by decreasing our imports, which is still a possibility.
OP: The IEA sounded pretty downbeat about the global economy in its report and the IMF just downgraded its growth target for the global economy. Do you see big downside risk to oil prices from a faltering economy? You see turmoil in China’s stock market…is that a big threat?
CL: You know, it is. And it’s really important to look at it that way. But we have to look at it in a Donald Trump-sort of way: There’s us, and there’s them. The U.S. is not even at 2 percent [GDP growth]. It is running record levels of crude oil the last two years consecutively…new records made each year. So our demand here is still good. It is going to grow, it’s going to continue to as long as we stay at that 2 percent growth.
When you talk about global growth, that is detrimental. That is shaky, at best. That is where there is a real oil glut. If the China’s, the Europe’s, the Latin America’s, and the Asia’s cannot keep up, and they see declines, you are going to have much bigger oversupply through 2016, and that will be a big problem.
OP: The dramatic cutback in spending plans on behalf of the oil industry worldwide…Do you see that setting us up for a price spike? Or are we still just so oversupplied that that won’t matter for quite a while?
CL: I think that if there’s a cutback in oil industry spending, if there’s a cutback in oil production in countries like the Venezuela’s or Nigeria’s, we will definitely have a supportive push in 2016 for oil prices.
But yes, I do think that down the curve, 2017 and 2018, if demand continues to pick up, there’s going to be a bigger chance of a spike. So we can hold a range for a year, maybe a little bit longer than that. But past that, there’s definitely a threat of spiking back up if demand stays on pace.
OP: In a similar vein, not a lot of people are talking about the incredibly small level of spare capacity that OPEC has sitting on the sidelines. Saudi Arabia is producing pretty much flat out and only has a little over 1 million barrels per day sitting in spare capacity. So, do you see that as an issue? Could a supply outage in Venezuela or Nigeria or anywhere else actually force up oil prices because we have limited capacity to address that outage?
CL: Normally, yes. Three, four years ago, absolutely. We could see a spike because of that lack of ability to get more oil online outside of Saudi Arabia. But the game has changed in the last few months even. The U.S. is producing 9 million barrels per day. We are importing 3 million from Canada alone.
So if prices were to go higher, I think that production in the U.S. could increase and even in Canada. And the difference now is that the U.S. can export crude oil. So if there is a lack of supply out there, the U.S. does have the ability to kind of make up some of that ground if necessary. So that’s the game changer here. The U.S. lifted the export ban and the high U.S. production, including Canadian production and possibly even Mexico…we could probably make up for that a lot faster than we could have in past years.
