News of terror attacks in Belgium have shaken up financial markets and the western world generally. Oil is gauging the sentiment in broader markets and is taking its lead from that. Hence, as the U.S. dollar firms and equities look lower, crude is selling off. Here are five things to consider relating to markets today:
1) On the economic data front, Japan has kicked off the latest round of preliminary manufacturing releases, with a surprise drop back into contractionary terrain at 49.1. Despite both German and French manufacturing coming in below consensus, the Eurozone number on the aggregate has shown a tick higher to a better-than-expected 51.4. Preliminary Eurozone services data also came in better than expected, boding well for the official March numbers out late next week (hark, April Fool’s day). US preliminary manufacturing has come in below consensus, but showing expansion at 51.4.
2) We’ve had quite the economic data deluge out of Europe today ahead of the atrocities which are overshadowing everything. UK inflation numbers have shown the struggle that the British economy is having in trying to clamber away from deflationary terrain; inflation came in below consensus at +0.3 percent YoY, as February disappointed. Related: New Wind Turbines Taller Than The Empire State Building
Meanwhile, we’ve had business sentiment data out of Germany, which was below consensus for both current conditions and for a 6-month forward outlook. For the Eurozone, the 6-month forward outlook came in better than expected, but is still the lowest since October 2014.
Eurozone ZEW economic sentiment (source: investing.com)
3) Realization is starting to dawn on the oil market that depletion rates are going to take their toll on global oil production levels, exacerbated by the hole that is going to be left by a dearth of new projects coming to market. According to Rystad Energy, ~3 million barrels a day of new production will be added to the oil market this year, while 3.3 million bpd will be lost from established fields due to depletion rates. Related: China’s Oil Majors See Production In Biggest Fields Shrink
This gap is expected to widen going forward as fewer projects come to fruition, leaving declining production to outpace new output by 1.2 million bpd next year. According to the IEA, oil and gas companies cut capital expenditure by 24 percent last year, and will reduce it by another 17 percent this year. Given this backdrop, the gap left by the lack of new production will continue to widen.
Click to enlarge)
4) We get the weekly API inventory report later today, with a seasonal build to crude inventories likely. Our ClipperData endorses this notion, given we continue to see a procession of arrivals to the U.S. Gulf Coast last week – 10 million barrels from Saudi Arabia, 2 million from Iraq, over 12 million barrels from Central and South America. So despite refinery runs remaining super-strong on a year-over-year basis, strong supply and ongoing refinery maintenance should mean a further build to the 523 million barrels of crude already in U.S. inventories. Related: The Current Oil Price Rally Is Reaching Its Limits
5) The chart below from the EIA illustrates how wells started within the last two years accounted for nearly 50 percent of U.S. production last year. Horizontal drilling tends to have very high initial production rates – explaining the ramp up in recent years.
But they also have steep initial decline rates. Hence constant drilling and development of new wells is necessary to maintain or increase production levels. As drilling activity slows across the various key shale plays, the effect of this is expected to filter through to lower production through the duration of this year and next.
(Click to enlarge)
By Matt Smith
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