The extreme volatility that struck the oil markets in late August and early September have calmed a bit – but just a bit. Oil fell on September 11, following the latest data from the EIA and IEA (more on that below). WTI was down on the market opening,
The EIA’s weekly data showed a surprise uptick in oil inventories, the second consecutive week of gains. Crude stocks jumped by 2.6 million barrels. After around three months of slow but steady drawdowns in inventories since the beginning of May, crude stocks have been largely unchanged (despite week-to-week movements) since the beginning of August. It is not coincidental that the pause in drawdowns overlapped with another dive in oil prices. The latest inventory build puts more pressure on prices.
However, we are finally seeing meaningful reductions in actual output, the most important indicator for investors watching for a balancing in the oil markets. All summer, the world has been left in a confused state over how long U.S. oil production would remain steady. But in the last two weeks, the EIA has published new data that points to a much deeper and more definitive slowdown in U.S. oil production. The best guess from the agency says that the U.S. is producing just 9.13 million barrels per day (mb/d), down around 500,000 barrels per day since peaking in April. Related: Why Saudi Arabia’s Pursuit Of Market Share Is Self-Defeating
The loss of around half a million barrels per day in production is equivalent to the entire output of individual countries, such as OPEC member Ecuador, or even Libya’s current production level. It is a significant reduction, and one that is accelerating. In June, the U.S. saw oil production dip by 100,000 barrels per day, but a few months later, the losses have grown to 140,000 barrels per day for the month of August. With investment on behalf of exploration and production companies shrinking, not expanding, the cutbacks will continue.
The IEA released its monthly report on September 11, and its conclusions largely back up the latest predictions from the EIA. The Paris-based organization believes that non-OPEC production will fall by 500,000 barrels per day in 2016, which will be the sharpest drop in the past quarter century. “Oil's price collapse is closing down high-cost production from Eagle Ford in Texas to Russia and the North Sea,” the report concludes. U.S. shale “is likely to bear the brunt” of the contraction, losing 400,000 barrels per day next year.
The high degree of price volatility is causing an exodus from exchange traded funds linked to oil prices. The United States Oil Fund (NYSEARCA: USO), which tracks the price of WTI one-to-one and is one of the most popular ways for investors to bet on oil prices, has fallen by more than 25 percent so far this year as oil prices have collapsed. But it is the extreme gyrations in prices that are scaring away investors. In early September, 19.3 million net shares were sold off, following the spike in volatility. That is a weekly record for the fund. USO’s total shares outstanding hit a one-month low on September 4 at 176 million shares. It has ticked upwards to 179 million shares since last week, but the fund lost $290 million in early September. The ETF has performed worse than WTI because of the need to rollover monthly contracts, which inflicts costs when oil prices are in contango. Related: Will We See OPEC’s Strategy Succeed Before Christmas?
Marathon Oil (NYSE: MRO) announced that it would cut 40 jobs from its payrolls, bringing its workforce cuts to 13 percent of its staff. The company also said that it will suspend plans for new oil and gas projects in conventional exploration. Spending on conventional exploration will be cut to just $100 million, 60 percent less than this year’s total. Instead, it will focus on its assets in the Gulf of Mexico and West Africa.
A subcommittee in the U.S. House of Representatives passed a bill this week that would repeal the ban on crude oil exports. Sponsored by Rep. Joe Barton (R-TX), the bill could go to the full Energy and Commerce committee next week. After that, it will need to be passed by the entire House, which is expected. However, the Senate is where the legislation faces its real test.
S&P Ratings Services slashed Brazil’s credit rating this week into junk territory. The BB+ rating is the worst rating for Brazil’s sovereign debt since 2008, and the country is facing its worst economic performance in 25 years. The downgrade could make conditions worse, as capital flees the country and puts downward pressure on the currency. S&P also downgraded state-run oil company Petrobras into junk territory. Related:: Goldman Sachs: Oil Could Sink As Low As $20
ExxonMobil (NYSE: XOM) says that it plans on increasing output at a key oil refinery in California, which could lead to higher production of gasoline and help relieve extraordinarily high gasoline prices on the West Coast. Production at Exxon’s Torrance refinery has been disrupted since February when the facility suffered an explosion. The Torrance refinery alone accounts for 10 percent of California’s gasoline supply. Since the outage, motorists in California have had to pay much higher gasoline prices than the national average. Price relief could come within a few weeks as Exxon ramps up output.
China is moving towards establishing a crude oil benchmark, which could be the third most important marker after WTI and Brent. The contract would trade on the Shanghai International Energy Exchange (INE). The establishment of an Asian oil marker makes sense, especially since China is the world’s largest oil importer. The new oil benchmark could be launched as early as October, but it could also be delayed. Up until now the Dubai Mercantile Exchange (DME) has been the main marker for contracts in Asia. Interestingly, the China oil benchmark would be priced in yuan, whereas everywhere else in the world oil is priced in dollars. As a result, analysts think that until the marker establishes itself as a credible oil benchmark, it could be used simply for currency traders swapping dollars for yuan.
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By Evan Kelly of Oilprice.com
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