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The Coming Oil Price Crash

We have been hearing a…

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Why Permian Prices Will Keep Breaking Records

Activity in the Permian is…

Oil Markets Caught By Surprise

Oil Rig

And as the world comes to terms with the news that the U.K. has voted to leave the E.U., the oil market is getting a wop bop a loo bop a lop bam walloped. Hark, here are five more energy-specific things to consider today:

1) Energy commodities are getting crushed as a result of the Brexit vote…although one is doing well: U.K. natural gas (aka NBP). Given it is denominated in pounds, and that the pound has been clobbered to its lowest level since 1985 (think: The Goonies, The Breakfast Club, Wham! with ‘careless whisper’ and ‘wake me up before you go-go’), it has suddenly become much cheaper in foreign currency terms.

Given the U.K. is connected to the continent by a reversible pipeline, the incentive to suck suddenly-cheaper gas from the U.K. has blown open the arbitrage between the two European entities. Combine this with news that the largest U.K. natural gas storage facility, Rough, may not be topped up as usual this summer due to an outage, and unlike the rest of the energy world, NBP looks up.

2) The chart below of Saudi oil inventories highlights that inventories are being drawn down, despite Saudi oil production remaining strong at around ~10.2 million barrels per day. Stocks have fallen for six consecutive months, the longest run in at least 15 years, as exports rise and refinery runs continue apace. Since reaching a record high last October, stocks have dropped by nearly 39 million barrels, and are now down to their lowest level since August 2014 at 290 million barrels.

3) Seasonally, Saudi tends to increase oil production in the summer to help meet higher power generation demand. The Kingdom burned 500,000 bpd of crude for power generation in April; this tends to rise through summer to peak in July / August at around 1mn bpd. Related: Australia Positioned For Asian Plastics Boom

As domestic demand increases, and as we see crude exports continuing to rise on a year-over-year basis, Saudi production is going to have to ramp up to meet higher demand. Our ClipperData below highlights that exports continue to rise; on a year-over-year basis, exports have risen ten out of the last twelve months. Saudi exports are holding around 7.5mn bpd so far this year, with June loadings continuing to show strength.

4) Taking a look at the economic data front (notice how I’m completely avoiding discussing Brexit? Will let the dust settle first…), and we have had German business sentiment data, which was optimistic across the board (that may change by next month). Across to the U.S., and notoriously volatile durable goods have been notoriously disappointing – led lower by a drop of 34 percent in military-aircraft orders. Stripping out transportation, durable goods still fell 0.3 percent. University of Michigan sentiment data was equally disappointing, below consensus across the board.

5) Finally, below is a nifty annotated graphic of bankruptcies seen in the oil and gas patch since late 2014. As oil prices rally (and having been recently joined by natural gas), we are seeing bankruptcy filings questioned by shareholders, suggesting the recent price rebound should be reflected into the companies’ latest valuations.

(Click to enlarge)

By Matt Smith via Clipper Data

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