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Oil Prices Falling Again As Oversupply Fears Reign

Oil Prices Falling Again As Oversupply Fears Reign

One hundred and thirty-four years after the birth of Virginia Woolf, and action in the crude complex is night and day compared to Friday. After rampant short-covering was seen at the end of last week, this week kicks off with a return to rampant selling. Normal service is resumed as oversupply fears return, and crude heads lower once more.

We’ve had a number of economic releases out of Russia, all of which point to a country feeling the pain of low oil prices. The Russian economy contracted by 3.7 percent in 2015, the biggest drop since 2009, while industrial production shrank by 4.5 percent YoY in December (worse than the -4.2 percent expected) and retail sales dropped by -15.3 percent YoY (although not as bad as the -16 percent expected). The unemployment rate remained at 5.8 percent in December.

Russian crude production is up at post-Soviet records despite low prices, as the government tries to pull in as much revenue as possible. Oil exports accounts for ~70 percent of Russia’s total export revenues; Russian oil production reached a Soviet-era high of 11.4 million barrels per day in 1987, before dropping to a low of 6.1 million bpd in 1996. Related: Moody’s Ponders Credit Downgrades for 120 Energy Companies

Driven by a shrinking population and increasing fuel efficiency for vehicles, Japanese crude oil imports have fallen to their lowest level since 1988. Oil product demand peaked in the fiscal year of 1999, and has been in decline since. According to the Japanese Ministry of Finance, imports fell by 2.3 percent last year.

According to our ClipperData, Japanese imports fell by 3 percent in 2015 on the year prior. The Arab / Persian Gulf overwhelmingly accounted for the largest portion of crude imports last year at 86 percent. Saudi Arabia accounted for 34 percent of total crude imports, followed by UAE (26 percent) and Qatar (11 percent). Related: Security Woes Threaten OPEC’s Second Largest Producer


Japanese crude imports by load region (source: ClipperData)

As we all know so well, all paths lead back to energy, hence Japan’s annual trade deficit has narrowed last year, led by…falling energy costs. The trade balance swung back into a surplus in December, as both imports and exports shrank by more than expected. Imports in December fell by a whopping 18 percent (h/t lower energy costs), while exports shrank by 8 percent (h/t slower demand from China). Related: How Soon Could A Sustained Oil Price Rally Occur?

OPEC Secretary General Abdallah Salem El Badri has been speaking at a conference today in London, with his slidedeck kindly posted onto the OPEC website. The chart below was the pick of the bunch, illustrating the relationship betwixt commercial crude stocks and prices: excessive stock surpluses impact crude prices.

 

Finally, the chart below illustrates the impact of fossil fuel subsidies on the GDP of some countries. The IEA estimates that these subsidies totaled $493 billion in 2014, while the drop in oil prices is giving way to a huge opportunity for some of these countries to unwind these subsidies.

According to a study last year, scrapping subsidies in 20 nations would cut CO2 emissions by an average of 11 percent within five years. While subsidies were originally implemented to provide a financial benefit to consumers, the result has instead been excessive consumption.

 

By Matt Smith

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