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Is U.S. Shale Nearing Collapse?

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OPEC Circus Sees Oil Volatility Spike

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Oil Rallies With Risk-On Rebound

Oil Rig

In honor of Brian Wilson’s 74th birthday, the oil market is picking up some good vibrations to start the week. As Brexit fears abate and risk-on returns, crude is propelled higher by a weaker dollar. Hark, here are five things to consider in energy markets today.

1) On the economic data front, German producer prices came in better than expected for last month (at +0.4 percent), but are still down 2.7 percent year-on-year (aka, deflationary terrain). Meanwhile, Japan kicked things off overnight with its first trade deficit in four months due to sluggish exports in the face of a rising yen. Imports also plunged, down 13.8 percent YoY, as (lest we forget, all paths lead back to energy) the value of crude imports tanked 30.8 percent.

2) As the graphic below illustrates, Japan has historically paid much higher prices for imported natural gas, but is gaining some clout amid a saturated global market. Given the lack of natural resources, Japan has been at a disadvantage for many years when it comes to prices paid for imported fuels, but the current environment presents an opportunity for change.

Japan accounts for ~35 percent of the global LNG market – which consumes 250 million tons per annum – and with an expected 40 million tons of capacity coming to market this year, with more to follow, a situation of oversupply is expected to persist into the next decade.

As the graphic illustrates, even though Japan continues to pay a premium, prices have dropped considerably in the last year. Japan is trying to take this opportunity to renegotiate contracts, shift away from oil-indexed prices, and to establish an internationally recognized spot LNG trading hub.

3) The latest CFTC and ICE data show that hedge funds have cut their net long position by 10 percent, while short positions have increased. This combination of bearish moves has been mirrored by a sell-off in the last week or so – as Brexit fears have caused the dollar to strengthen, while supply outage fears have abated. Tentative signs of increased drilling activity have also added to the bearish skew.

(Click to enlarge)

4) Yet while tentative signs of rising drilling activity have materialized in a rising rig count in recent weeks, many producers are nervous about ramping up drilling operations without seeing a period of price stability. Hess is one such producer who is waiting for a higher oil price before adding rigs; it is waiting for at least $60/bbl before ramping up drilling and fracking operations across most U.S. shale plays. Related: Saudi Aramco IPO, Not for BP

Pioneer Natural Resources is somewhat at the other end of the spectrum, saying it will increase its rig fleet by 40 percent: ‘the Permian is set up for fairly explosive growth over the next several years’ said its CEO, Scott Sheffield. Oil’s ten-month high yields a rig response:

(Click to enlarge)

5) We have had a record start to this year’s Atlantic hurricane season, aided by the appearance of Hurricane Alex back in January. We are not yet three weeks into the official 2016 Atlantic hurricane season, and Alex has been joined by Bonnie and Colin….and now Tropical Storm Danielle. Danielle is not impacting energy prices, heading for landfall 75 miles east-southeast of Tuxpan, Mexico instead. But she does serve as a reminder that hurricane season is something to be vigilant of, despite the lack of activity in the Gulf of Mexico in recent years.

By Matt Smith

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