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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Oil Up As Quarterly Earnings Season Kicks Off

One-hundred and sixteen years after the birth of seismologist Charles Richter, and the crude market is trying to break some ground today. Rumbles in the market are being caused by quarterly earnings season, with prices rebounding thus far. Hark, here are seven things to consider in the market today:

1) BP has kicked off quarterly earnings for the oil majors, and stripping out one-time charges, it saw a surprise profit of $532 million in Q1, versus an expected loss of $140 million. Nonetheless, this is still down 80 percent on the $2.6 billion profit seen in Q1 last year.

The overarching theme moving forward remains cost-cutting, with capex expected to drop to $17 billion this year, down from $25 billion in 2013; next year it could drop to as low as $15 billion. Total is up next, reporting tomorrow. Related: Can This Pipeline Unlock East-African Oil Potential?

2) The main economic data of note today has been from the U.S., with notoriously volatile durable goods data. Orders were below expectations across the board, with the headline number rebounding less than expected given waning demand for automobiles, computers and electrical goods last month. The latest Federal Reserve meeting kicks off today, culminating tomorrow with a (non) decision on interest rates. Meanwhile, we get a deluge of quarterly earnings to poke, push and prod financial markets around.

3) Saudi Arabia’s Prince Mohammed bin Salman gave a broad overview yesterday of economic reforms that are going to be released in six weeks. The goal of these reforms is to wean Saudi off its reliance on crude and diversify its economy, sponsored by the sale of a 5 percent stake in the state-run oil company, Saudi Aramco. The target of the reforms is to make spending more efficient, as opposed to reducing it.

The below graphic illustrates the country’s reliance on oil and gas: it accounts for 40 percent of its GDP, and accounts for ~75 percent of state revenues. The drop in revenues due to lower oil prices has left a large hole in its budget – one it has used foreign reserves to plug. As illustrated below, foreign reserves continue to be whittled lower:

(Click to enlarge)

4) Qatar is the latest country to scrap fuel subsidies amid the low oil price environment. It will remove gasoline and diesel subsidies next month, as it tries to counter an expected budget deficit this year of 2.7 percent of its GDP. Qatar is following in the footsteps of other oil rich neighbors, such as UAE, who removed subsidies last year.

5) Yesterday we looked at how our ClipperData show Chinese waterborne crude imports are on target to reach a record volume this month. The chart below takes a look at Arab Gulf loadings by destination; China is the leading destination for Arab Gulf crude, accounting for 15 percent of total loadings. Related: Horizontal Land Rig Count Summary 22nd April 2016

Japan is the second most popular destination with just under 15 percent. India and South Korea both account for 13 percent of loadings, while the U.S. still absorbs 8 percent of crude exports from the Middle East. These five countries account for two-thirds of all loadings from the region.

(Click to enlarge)

(Click to enlarge)

6) As demand fails to keep up with rising supply, the monthly average Asian spot price for LNG has dropped to a seven-year low. It is down 42.5 percent year-over-year to $4.24 for May, as the Asian market – which makes up ~75 percent of the global LNG market – lacks the need for spot LNG cargoes. Related: The Real Reason Saudi Arabia Killed Doha

Asian nations are already mostly locked into long-term LNG contracts, purchasing more than they need as demand wanes. Additionally, an ongoing focus on nuclear power by the two largest global LNG consumers, Japan and South Korea, could pressure demand even lower in the coming years.

7) The timing of the Asian LNG price low is interesting given this morning’s ‘today in energy‘ post by the EIA, which shows Canada looking to start LNG exports in 2019.

As Canadian production is set to rise, and as rising domestic consumption is not enough to cover the drop in net-exports to the U.S., Canada is banking on global LNG demand (read: Asia) to be the jigsaw piece to complete its demand-side puzzle. Given how global LNG supply build-out is expected to continue outpacing demand through the rest of the decade, Canada may struggle to find a home for all of its exports.

(Click to enlarge)

By Matt Smith

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