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Despite Robust Demand Is Oil Set To Fall Once Again?

Oil Rig

Seventy-two years after Marvin Camras patented the wire recorder, and movement in the oil market today is being dictated by hopes of stronger supply (production returning from outages) and firm demand (echoed by the OPEC report) – all amid a backdrop of economic concerns. Hark, here are six things to consider today in energy markets.

1) First up, we’ve had a couple of key economic releases out of China overnight; retail sales were slightly below consensus, coming in at +10.0 percent YoY for May (versus 10.1 percent). Offsetting this, industrial production came in better than expected at +6.0 percent YoY for May (versus 5.9 percent), holding at the same level as the month prior. Fixed asset investment has continued to drop on a year-over-year basis, now only +9.6 percent - the slowest pace of growth in fifteen years. There’s little else in the way of other global economic data to digest on this national ‘kitchen klutzes of America’ day.

China industrial production, percent YoY

2) The latest OPEC report has been none too controversial; the cartel has kept oil demand growth at +1.2 million barrels per day for this year. It still sees non-OPEC supply contracting by 740,000 bpd this year, although the sources of these losses have been shuffled somewhat from last month.

Total production from the cartel fell by 100,000 bpd last month, as Nigerian production dropped by a whopping 250,000 bpd, while Venezuela, Iraq and Libya also saw material losses. To offset these losses, Iranian production increased by 89,200 bpd to 3.56mn bpd, and Kuwaiti production kicked 93,300 bpd higher.

3) The below chart bears an eerie resemblance to last year, with the price move betwixt the two years at a very similar pace (rising 18 cents per day from lows this year, compared to 19 cents last year).

While the back-drop for last year was different to the one currently faced, there are still common themes: demand looks robust, while OPEC members continue their market share battle – regardless of pricing. Returning barrels from Canada and Nigeria could provide the bearish catalyst for a tipping point lower this time around.

(Click to enlarge)

4) We at ClipperData have been fairly vocal in recent weeks and months about how strong Chinese oil imports have been, and how astounding the pace of stock-building has been from them. Nonetheless, the counterweight to strong imports comes in the form of falling domestic production. Related: $50 Oil Has U.S. Rig Count Increasing For 2nd Week In A Row

As the chart below illustrates, Chinese domestic production in May has dropped by the most in fifteen years, dropping 7.3 percent to below 4 million barrels per day amid producer cost-cutting. But despite this drop in production, rising imports are more than offsetting this loss.

(Click to enlarge)

5) The chart below is from the EIA this morning, and illustrates how much progress the state has made in terms of cutting back on natural gas flaring – both in absolute and percentage terms.

The flaring rate peaked in January 2014 at 36 percent, before dropping to only 10 percent in March of this year – the same month that total natural gas production for the state reached a record at 1.71 Bcf/d. As new pipeline infrastructure has been built out, more gas is making its way to market…and less is being flared.

6) Finally, the below chart is pilfered from the IEA; it shows projections for the change in natural gas production across various key global regions. Natural gas production is expected to rise in the U.S., Australia, Qatar, China and Russia in the coming years, with Australia set to challenge Qatar for the crown of largest LNG exporter. Related: Iran And India Risk Regional Backlash Following Latest Investment Deal

Total global natural gas demand is projected to have grown last year, after stagnating in 2014. The IEA projects that Chinese natural gas demand growth slowed to only 4 percent last yearcompared to 15 percent betwixt 2009 and 2014 – although it should rebound moving forward as the country diversifies away from coal. Indian natural gas demand is expected to be stronger, increasing at 6 percent per annum through the duration of the decade.

(Click to enlarge)

By Matt Smith via ClipperData.com

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