Weak Global Economic Growth Linked To Oil Price Collapse

We begin with a quick look at some of the critical figures and data in the energy markets this week before looking at some of the key market movers and providing the latest analysis of the top news events taking place in the global energy complex over the past few days

(Click to enlarge)

(Click to enlarge)

Chart of the Week

• Lost amid the hype over the collapse of oil prices has been the dramatic plunge in natural gas prices.

• Average spot prices for Henry Hub in December were down to $1.93 per million Btu (MMBtu), the lowest monthly average since 1999!

• The EIA expects prices to average around $2.50/MMBtu in 2016 and $2.80/MMBtu in 2017. But using a broader 95% confidence interval, the EIA sees natural gas trading in a range of $1.61/MMBtu to $3.52/MMBtu for April 2016 contracts, which is, admittedly, a rather wide range.

• Natural gas production is actually in decline though, which should eventually lead to higher prices. Gas production jumped by 6 percent in 2015, but began declining after hitting a peak in September at 80.2 billion cubic feet per day.

• Two more reasons to be bullish: more gas is being used in the electric power sector; and the U.S. is set to begin exporting LNG in March. By mid-2017, the U.S. could be a net-exporter of natural gas for the first time since 1955. Related: Security Woes Threaten OPEC’s Second Largest Producer

Market Movers

• Sanchez Energy (NYSE: SN) announced that it has amended its credit facility agreement, which will reduce its borrowing base to just $425 million, down from $500 million. The company does not plan on drawing on the facility, and says that it will fund its $200 to $250 million in capex with cash on hand and from cash flow.

• Barclays says that the likelihood that ConocoPhillips (NYSE: COP) cuts its dividend over the next couple of quarters is more than 50 percent. The company had a $5.5 to $6 billion cash burn in 2015 and one of the industry’s most generous dividend payouts. Barclays says the dividend should be cut by at least 75 percent.

• Halliburton (NYSE: HAL) reported a 4Q of $28 million or -$0.03 per share. That is actually an improvement from the $54 million loss in the third quarter, but the company is still hurting from the downturn.

Tuesday January 26, 2016

Oil prices fell on Monday on negative news coming from China and on comments from top Saudi officials that there will be no let up in oil production. China revealed on Monday that its full-year consumption of diesel declined in 2015 compared to a year earlier, bolstering fears that China’s economy is faltering. On the same day, Saudi Aramco’s Chairman said that the state-owned oil company would continue to invest in new sources of oil production and that the country could endure low oil prices for “a long, long time.”

Together, the news reversed the strong gains in oil prices from last week. Oil was back down to $30 per barrel to close out the day on January 25. But oil then rebounded on Tuesday by 2 percent. As of midday, WTI traded up to $31 per barrel and Brent hit $31.31. Related: How Soon Could A Sustained Oil Price Rally Occur?

Of course, weighing on crude oil prices are concerns about the health of the global economy. Growth is sluggish in most parts of the world. Europe is stagnant, parts of Latin America are in recession, and China is no longer the growth engine that the world has counted on for the past decade. In fact, the markets are increasingly interpreting the collapse in commodity markets as a potential harbinger of a souring economy. In the past, plummeting commodity prices have only been associated with severe recessions (see: Global Financial Crisis 2008-2009).

In normal times, short-term swings in commodity prices usually move inversely to global equities. Recently, however, moves in oil prices have been more closely correlated with moves in the stock market, and movements have occurred in in the same direction, a rare development that highlights fears about the global economy. In fact, the correlation between oil and global stocks hit 0.5 over the past four months, the highest level in more than two years. But 2016 has started off even more worrying. The Wall Street Journal finds that so far in January, the correlation is at 0.97, meaning the two metrics are essentially moving in lock step. Again, to reiterate, such an unusual correlation is usually associated with recessions.

Leaving that aside, a growing number of oil analyst are at least starting to see light at the end of the tunnel. Part of the rally last week was due to short traders covering their positions, suggesting that many speculators see oil as oversold. "It’s when everyone starts getting to that one part of that market that you usually see a turning point. Historically that's when we've started seeing a reversal," Barclays analyst Miswin Mahesh put it succinctly to Reuters. Just as a long list of forecasters predicted $20 oil in recent weeks, many are also calling for oil to rise in the second half of this year to more reasonable levels. Citi sees oil back to $52 by the end of the year, for example.

Meanwhile, the cutbacks in the Canadian oil patch continue. A new estimate from the Canadian Association of Petroleum Producers expects the industry to invest CAD$42 billion (USD$29.5 billion) in 2016, a 13 percent reduction from last year and a 48 percent reduction from 2014. For conventional oil and gas, the figures are worse – a 55 percent cutback between 2014 and 2016. That compares to just a 38 percent decline in investment for oil sands over the same time period. Related: U.S. Land Rig Count 22 Jan 2016

Oil sands have seen a slower drawdown in spending because they are long-term propositions that cannot start and stop on a dime. As a result, Canada’s oil production is expected to continue to rise during the downturn, increasing from 4.28 mb/d in 2015 to 4.49 mb/d this year. Still, nearly all oil sands producers are losing money on each barrel sold at current prices. The benchmark price for heavy crude in Canada, Western Canada Select (WCS), traded at just $17 per barrel on Monday.

Iranian President Hassan Rouhani visited Rome this week, and Iran and Italian companies inked several large oil and gas deals. Iran is moving quickly to try to attract foreign investment. Italian oilfield services company Saipem (BIT: SPM), a subsidiary of energy giant Eni (NYSE: ENI), signed a memorandum of understanding for work in Iran. Financial details were not provided, but could be worth billions of dollars.

Libya has failed to take in $60 billion from lost oil production and the inability to export to its full potential, according to an estimate from the National Oil Corporation. Libya’s oil production is now down to about 362,000 barrels per day, far below the 1.6 mb/d that the country produced before the downfall of Qaddafi. Now the country is dealing with potential lasting damage to its oil fields and infrastructure from ISIS attacks.

According to the National Oil Corp.’s chairman, one of Libya’s oil fields, the El Feel, has lost 100,000 barrels per day in capacity because of lack of use, which could be permanent damage. Many of Libya’s oil fields have been throttled back because the country’s main export terminals have been shuttered for over a year.

Libya’s two rival governing factions are inching forward on reconciliation, most recently with the January 19 agreement to form a unity cabinet, although the eastern government voted against the move. The political stalemate continues, but there are glimmers of hope in the UN-backed negotiations to form a unified government, which would go a long way towards beating back ISIS and getting the country’s oil production back on track.

Stock market volatility continues in China, with the Shanghai Composite down another 6 percent on Tuesday. The markets are also concerned that the yuan could be forced to depreciate even more, and the Chinese government has thus far failed to stem the capital outflows.

The Federal Reserve is expected to report the minutes from its latest meeting on Tuesday. Since its modest interest rate increase in December, the global financial markets have undergone a wild ride. There is growing speculation that the Fed will not be able to meet its schedule this year of incrementally raising rates. For now, no action is expected, but the central bank is no doubt keeping tabs on the shaky state of stock markets around the world.

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