Forty-six years after the debut of Sesame Street, and crude has tried to hold on to a positive attitude (think: Big Bird), but is ending up more like Oscar the Grouch. And it can be excused for this grumpy disposition, given another round of poor overnight economic data, combined with a bout of dollar strength.
Chinese inflation data stumbled through deflationary terrain for the first month in five as October dropped by 0.2 percent on the prior month. On a year-over-year basis, inflation is now up a mere 1.3 percent, and aside from a blip lower in February of this year, it is the lowest level since late 2009. The change in the price of goods (aka, producer prices) was negative on a year-over-year basis for the 44th consecutive month, down -5.9 percent for October, which was below the consensus of -5.8 percent. Related: Fusion Energy Facing A Major Test This Month
China CPI, YoY (source: investing.com)
A dearth of data elsewhere after last week’s onslaught has left slim pickings on the economic data front. French industrial production was in line with consensus, up 0.1 percent in September on the prior month, while Italian industrial production grew by 0.2 percent, but below consensus of 0.5 percent. Both U.S. import and export price indexes were negative on the prior month. Related: Venezuela Liquidating Assets As Economic Crisis Worsens
The below comment is from Saudi Arabia’s vice oil minister, Prince Abdulaziz bin Salman, who spoke yesterday in Qatar. It is particularly resonating: ‘Beyond 2016, the fall in non-OPEC supply is likely to accelerate, as the cancellation and postponement of projects will start feeding into future supplies, and the impact of previous record investments on oil output starts to fade away’.
This is a theme echoed by IEA today too, in the release of their World Energy Outlook (complete with accompanying press conference). The agency alluded to a similar theme as our aforementioned Saudi Prince, saying U.S. supply will decline by three million barrels per day if prices hover around in the $40s through the rest of the decade (um, seems unlikely). As the below chart illustrates, IEA projects that prices will need to be between $60-70 in the coming years to keep production on an even keel.
All the while, IEA highlights that we are a long way from a price recovery, saying we are unlikely to see $80 oil until 2020. Later today we get EIA’s Short Term Energy Outlook, which will no doubt affirm fears of immediately falling U.S. production given what we saw from yesterday’s monthly drilling productivity report (hark, Eagle Ford production now down 25 percent from its high earlier in the year).
Countering this view, however, is Q3 earnings season from the oil and gas industry, which presents a view in juxtaposition to this: production is holding up, as are credit lines, while rampant efficiency gains are helping to offset severe cost-cutting. In addition, we have Gulf of Mexico production rising to counter some of the shale play losses; all may not be as bad as some think.
By Matt Smith
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