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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Crude Stabilizes After 6 Day Rally

Refinery U.S.

As we truck on into the weekend, oil has turned lower after six consecutive days of rallying. (Only another 5.5 weeks until potential freeze talks in Algeria...). Later we get the latest CFTC data to see how emphatic short-covering has been, but for now - hark, here are five things to consider in oil markets today:

1) North Sea oil output is set to reach a 2-year low next month, as Buzzard, the largest oil field in the UK North Sea - and linked to the Forties crude stream - is set to undergo maintenance for a month, starting in mid-September.

As our ClipperData illustrates below, crude oil loadings of Forties have gradually ticked lower throughout this year. After recent refinery strikes and impending maintenance, loadings are set to continue on this trajectory into the fall (err, autumn).

We have seen five loadings of the light sour grade at BP's Hound Point terminal so far this month; while the majority of this crude is being discharged in Europe, Asia is the biggest market for Forties crude, with South Korea and China locking horns to become its leading recipient.

(Click to enlarge)

2) Lower output from the North Sea is combining with Nigerian outages to flatten the term structure of Brent crude. EIA pointed out yesterday, Nigerian crude output has been dropping significantly this year, with rising disruptions in the Niger Delta. As of May, disruptions were pegged at 750,000 bpd.

While we have seen Nigerian crude oil loadings holding up better than expected in Q2 as alternate crude streams have stepped up to offset force majeures, the return of force majeures to key grades of late is finally having a material impact on exports. While loadings of Forcados and Brass River are still strong this month, our ClipperData show Escravos and Qua Iboe exports have dropped off considerably.

(Click to enlarge)

3) Yet while a number of supply concerns persist, there are stories of rising supplies elsewhere to offset the bullish influence. Not only did we hear whispers out of Saudi this week that August production is likely to reach a new record - likely encouraged by a heatwave, ergo strong power generation demand - Libya is seeing positive developments too.

The Zeuitina terminal has just finished its first loading in ten months aboard the New Hellas, which is now leaving port. While one data point doesn’t signal a trend, a deal by the PFG (Petroleum Facilities Guard) with the new unified Libyan government has paved the way for two other ports to be potentially reopened.

4) (Full disclosure: I was super-happy to see an update of the below chart, as it highlights the waning concerns about debt in the U.S. oil patch). As investors ramp up their increasingly arduous search for yield, U.S. energy junk bonds now demand the lowest yield in more than a year. Related: Oil Output Continues To Fall In North Dakota

The extra yield on energy junk bonds compared to the broader high-yield market rose to 11 percent earlier in the year, as oil prices ventured into twenty-dollardom. However, as oil prices have rallied and investors have dismissed the likelihood of another decline in prices and/or another wave of bankruptcies, energy junk bonds have rallied almost 40 percent from March to July. Energy junk bonds now yield a mere 2 percent more than the broader market, kicking around at the lowest premium in a year.

(Click to enlarge)

5) Finally, the below chart is from the IEA, and shows the global annual change in energy production from 1970s to 2014, compared to 2013-2014.

There are two key takeaways; one is that renewables (other than hydro and biofuels) have been leading the charge in terms of annual production growth over the last three and a half decades. The second takeaway is that the two sources that saw production growth ticking higher for the 2013 - 2014 versus the long-term average was renewables....and oil. This makes sense, given this was when the U.S. shale boom was in full swing.

By Matt Smith

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