One hundred and twenty-one years after W.G. Morgan invented volleyball, and from a rally that started with a spike overnight, we are now seeing some digging instead.
For once, the IEA has managed to land the first punch, putting out its monthly oil market report before the EIA report (the short term energy outlook is out later today) and OPEC (hark, tomorrow). To be honest, if you are looking for some heartening news of rebalancing in the crude market, you may want to read something else.
For the report highlights five potential scenarios which could be bullish for prices – a coordinated production cut, slowing OPEC output, a weaker U.S. dollar, falling non-OPEC output – and then serves to dispel them, one by one.
It maintains its status quo on oil demand growth expectations for this year at +1.2 million barrels per day, while highlighting the strength from the supply-side of the picture, led by OPEC. It says OPEC production increased last month, courtesy of Iran, Saudi Arabia and Iraq, showing year-on-year production growth from the cartel at +1.7 million bpd.
We too see this strength in our ClipperData, as January loadings in the Arab Gulf reached their highest level since last March, with both Iraqi and Iranian loadings at their highest level in at least three years.
Bearish news abounded from the agency as it highlighted that OECD commercial stocks built by a counter-seasonal 7.6 million barrels in December, catapulting inventories above 3 billion barrels. And while economic weakness provides the biggest downside risk to the demand side – and specifically from Brazil, Russia, and China – it still sees strong stock builds through the year, leading to the conclusion that ‘the short term risk to the downside has increased‘. (See, I told you it was bearish).
Yesterday saw the release of the EIA’s drilling productivity report. Based on the EIA’s forecast for March, production at Bakken next month will have fallen 13 percent from its peak in December 2014, down to 1.1 million bpd. Eagle Ford is predicted to have fallen a much steeper 28.5 percent from its high last March to 1.22 million barrels per day. Finally, Permian continues to gradually tick higher, now up to 2.04 million bpd. Total production from the seven shale plays that EIA focuses on has now dropped below 5 million bpd for the first time since September 2014, down 10 percent.
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The below charts have been pilfered via Twitter, and highlight that about a half of all project cancellations going forward are high-cost, low-decline projects. This is essentially referring to oil sands and deepwater projects, meaning that in their absence decline rates are going to increase.
We are already seeing signs of these cancellations in action, as Chevron, ConocoPhillips and Hess Corp are withdrawing from more costly deepwater projects, focusing on ‘short cycle’ projects instead.
(Click to enlarge)
Finally, despite a fairly balmy start to winter, the chart below illustrates how natural gas consumption from the electric power sector has been higher than in any previous winter. As lower natural gas prices spur on greater consumption, in combination with lower coal capacity, gas burn has averaged 25 Bcf/d so far this winter, up 17 percent from last year – and up a whopping 33 percent versus the five-year average.
By Matt Smith
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