First of all, let’s take a quick look at some of the critical figures and data in the energy markets this week.
We see the oil rig count plunging hard this week as 21 oil rigs and 7 natural gas rigs are taken out of action.
A major deal in Paris over climate change could alter the course of energy markets. Plus, a lesser-publicized deal in Washington could hand a major victory to shale producers.
We will then look at some of the key market movers before providing you with the latest analysis of the top news events taking place in the global energy complex over the past few days. We hope you enjoy.
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Chart of the Week
• The U.S. only imported 0.6 million barrels per day (mb/d) from Mexico in September 2015, the lowest level since 1990. Oil imports from Mexico have fallen by half since 2011.
• Mexico has pivoted to Europe and Asia for its exports, which have climbed in corresponding fashion to offset the decline in exports to the U.S.
• Part of the decline in Mexican oil imports is the result of much higher oil production within the United States. However, Mexico’s heavy oil has also been displaced from larger imports of heavy oil from Canada.
• Another factor is Mexico’s own falling oil production capacity. The massive Cantarell oil field has been in decline for years.
• Mexico’s oil exports to India, South Korea, Japan, and Spain have increased significantly, and to a lesser extent to Italy, France, and the Netherlands.
• Cheniere Energy’s (NYSE: LNG) CEO Charif Souki was removed by the company’s board just as Cheniere is gearing up to ship its first LNG cargo from the Sabine Pass LNG export facility on the U.S. Gulf Coast. Activist investor Carl Icahn has taken a stake in the company, and objected to Souki’s ambitious plans to roll out more LNG export facilities amid a market downturn. Icahn and the board wanted to rein in ambition (and risk), so Souki is out. Cheniere’s share price was down 3 percent on December 14 and is down by more than 2 percent as of mid-day trading on December 15. The company’s stock is also down by about half since April 2015.
• The climate change deal sealed in Paris over the weekend sank the share prices of coal companies. Peabody Energy (NYSE: BTU) was down by around 15 percent on Monday; Cloud Peak Energy (NYSE: CLD) was off by a similar amount. Meanwhile, renewable energy stocks shot up on market expectations that countries could step up efforts to deploy solar and wind. A range of solar companies saw their share prices jump by 5 to 10 percent.
• Chesapeake Energy (NYSE: CHK) is reportedly working with Evercore Partners Inc. on reducing its debt load, as the pressure continues to mount. Its stock is down 80 percent in 2015, and has even dropped by half from just October. Natural gas prices have dipped to 14-year lows, draining revenues from the nation’s second largest natural gas producer.
Tuesday December 15, 2015
Nearly 200 countries agreed to an historic climate change accord in Paris over the weekend, sending a signal to financial markets about where governments intend on heading over the next few decades. First things first: the deal is not mandatory, so the pledges are being taken with varying degrees of salt depending on one’s perspective.
However, if the movements of stock markets are anything to go by, investors are not entirely ignoring the commitments made in Paris. Coal companies got pummeled on the first day of trading after the announcement, with many tickers seeing a sell off of 10 percent or more. Renewable energy companies basked in the glow of the deal, with surging share prices as investors took in the news.
The transition to clean energy will take place on a long and bumpy road, but investors appear to be taking the transition seriously. Solar and wind continue to see costs decline, making them increasingly competitive. But it is important to remember the difference between the transportation sector and the electric power sector. While coal will be around for a while, it is increasingly under fire from natural gas, solar, and wind. That trend could accelerate if governments are serious about their climate pledges. In short, coal is in structural decline. Oil is another animal though. Without a serious alternative to crude oil for the transportation sector, oil companies will have a brighter future than coal. The current downturn in oil markets is significant, to be sure, but it is cyclical rather than structural. Unless, that is, the Paris climate deal is a harbinger of a much more ambitious agenda to rid the world of fossil fuels. For now, that remains a ways off.
While the climate change accord represents a potential negative black swan event for the industry, in the U.S. the oil industry is about to receive a gift. As part of the Congressional budget deal, Republicans and Democrats are on the verge of lifting the crude oil export ban. Lifting the ban has gone from an extremely remote possibility to a nearly done deal in an astonishing short period of time. In exchange for Democratic support, Congress could extend tax credits for renewable energy, fully fund some conservation programs, and remove language that attacks EPA authority. Both sides see something to gain from the deal, and if the bill is signed into law, it will mark a major legislative victory for the oil and gas industry.
At the same time, it is unclear how much oil will actually be exported from the United States. The logic behind the legislative push is the price differential between WTI and the more internationally-linked Brent marker, a spread that was once very large. But the difference between the two has narrowed over the past year as shale production in the U.S. has ground to a halt, while globally, supplies have increased. For example, the spread as of December 15 is just $1.50 per barrel. But that difference was more than $20 per barrel just a few years ago. According to Energy Aspects Ltd., the spread needs to be at least $4 per barrel in order to make sense. “We don’t believe at current spreads there is any impact, as exports would not be profitable,” said Amartya Sen, Energy Aspects’ chief oil economist.
Natural gas prices have dropped below $2 per million Btu (MMBtu), falling to the lowest level in 14 years. High production levels, high storage, and very warm December temperatures in the East Coast of the U.S. have led to only moderate consumption for this time of year. In fact, the U.S. is seeing the warmest start to winter on record. Natural gas prices have dropped by 34 percent in 2015. That is good news for consumers – electricity rates won’t rise by much and in some cases could fall. But for natural gas drillers, today’s market is the worst it has been in years. While the bust in oil prices is getting all of the attention, the downturn in natural gas is just as significant.
The selloff in the high-yield bond market continues to accelerate, driven mostly by depressed market conditions in the energy sector. The Wall Street Journal reports that some investors are even having trouble finding buyers for their junk bonds. Capital outflows from the high-yield bond market are picking up as crude trades in the mid-$30s per barrel. For now, most market analysts don’t see the carnage in the high-yield market spreading to the rest of the financial system, but the volatility needs to be watched.
In its latest monthly Oil Market Report, the IEA doesn’t see oil markets balancing out until late 2016. The IEA sees demand growth easing from a five-year high of 1.8 million barrels per day (mb/d) in 2015 to just 1.2 mb/d in 2016. Still, the IEA acknowledged that OPEC’s decision to scrap its production target does not fundamentally change the current state of oil markets. OPEC producers will continue to try to maximize output, just as before. The IEA sees the market share strategy working, as U.S. oil supply is expected to contract by 0.6 mb/d next year.
By Evan Kelly of Oilprice.com
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