Thirty-two years after Cyndi Lauper released one of her most popular hits (how scary is that?!), and yep, the weekly EIA inventory report heralds a bearish tone for the crude complex….time after time.
Last night’s API report yielded a whopping 11.4 million barrel build to crude stocks, as a combination of planned and unplanned refinery maintenance gives way to a diminished need for crude in the system. Yesterday’s rumors and murmurs of OPEC and non-OPEC coordinated cuts have been thrown by the wayside, while focus on the ailing U.S. shale industry returns to the fore amid quarterly earnings results.
While widespread capex cuts are nothing new in the current environment, the announcement by Continental Resources – the second-largest oil producer in North Dakota and one of the most cost-efficient – that it needs prices to rise above $37 to be profitable is spooking the oil industry today. Further stoking these fears is Continental’s acknowledgement that it is cutting production this year by 10 percent as it has no more wiggle room for innovation. On the flipside, Pioneer Natural Resources is boosting capex modestly; this is likely facilitated by its aggressive hedging program (at prices much higher than current levels). Related: OPEC’s Trillion Dollar Mistake
Onto the economic data front we go. Hot on the heels of yesterday’s better-than-expected confidence data out of the U.S. comes decent numbers from France and Germany today. Brazil and Italy were the Debbie Downers, coming in more downbeat than expected. There is a sprinkling of housing data here in the U.S. before the weekly inventory report. Oh, and then we have the small matter of the conclusion of the Federal Reserve’s FOMC meeting. While no rate hike will be forthcoming, the subsequent statement following the conclusion of the meeting will be dissected with microscopic precision.
While much speculation swirls around the return of higher Iranian crude exports to the market, it mustn’t be overlooked that Iran holds the world’s largest reserves of natural gas – ahead of Russia, Qatar, Turkmenistan and the U.S. With the lifting of sanctions, Iran is exploring the possibility of reigniting its natural gas exports ambitions.
While a timeline of two years seems somewhat over-ambitious, it doesn’t seem unrealistic that it could boost LNG exports significantly by the end of the decade. While it is still lacking infrastructure, it does already have in place a network of international pipelines, as well as LNG facilities. It currently exports nearly 1 Bcf/d to Azerbaijan, Armenia and Turkey, and officials indicate it could export more than triple this volume to the EU in the longer term.
Yesterday we took a look at oil in relation to Exxon’s view to 2040; today let’s take a peek at the natural gas side of the equation while we are on the topic. As mentioned yesterday, Exxon’s long-term forecasts need to be taken with a pinch or two of salt – as do all long-term forecasts; but the directional bias of the trends is useful to consider.
Exxon sees Russia and the Caspian region extending their lead as the world’s top natural gas exporter in the coming decades, rising to over 40 Bcf/d, while African natural gas exports are expected to double – albeit from a low base. North America’s exports grow considerably, up to nearly 30 Bcf/d, as domestic unconventional production more than doubles.
Europe continues to rely on imports – although demand is forecast to remain relatively flat, while rising Asia Pacific demand outpaces unconventional production coming on line in the region. By 2040, Exxon projects that unconventional gas will account for about a third of total global natural gas production. This rise is overwhelmingly led by the US:
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Finally, according to the latest EIA data, coal’s share of the generation mix dropped in November to a record low of 29 percent – while natural gas maintains its position as the dominant fuel for the fifth consecutive month. A combination of EPA rulings against the coal industry, as well as ultra-low natural gas prices, have pushed coal into unchartered territory.
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By Matt Smith
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