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Hedge Funds Killed The OPEC Rally

Despite the success of OPEC’s…

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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Global Oil Production On Pause, But Decline Seems Imminent

Global Oil Production On Pause, But Decline Seems Imminent

One hundred and seventy-six years after the birth of John Boyd Dunlop, and the crude complex is coming under pressure again.

It is Nonfarm Friday, which means that the market is all a’flustered, digesting the soon-to-be-revised official monthly U.S. unemployment report. The report was fairly underwhelming from a headline perspective; only 151,000 jobs were created last month, versus an expectation of 190,000.

That said, there was some solace to be found for those of a glass half-full persuasion, as not only did the unemployment rate tick to a new eight-year low of 4.9 percent, but average weekly hours worked ticked higher, and the participation rate continued to clamber away from multi-decade lows, reaching 62.7 percent. A little bit for everyone here.

U.S. unemployment rate, 2007 – present (source:investing.com) Related: The $2 Trillion Gift From Oil Companies To Consumers

Perhaps the most interesting statistic of the day, however, has come from Wood Mackenzie, who says that only 0.1 percent – or 100,000 bpd – of global oil production has been curtailed thus far due to the price slump. It says this drop, albeit modest, has come from the Canadian oil sands, U.S. conventional production, and from the UK’s North Sea.

Wood Mackenzie estimates that 2.2 million barrels per day of Canadian production is currently ‘cash negative’, while so is 230,000 bpd of Venezuela’s heavy oil production, and 220,000 bpd of production from the North Sea. It is also important to note that although we are not seeing considerable production losses, we are seeing a lot of oil being left in the ground that otherwise would have been extracted.

Production on pause, so to speak. It would seem that 100,000 is the number of the day, as it is also the number of job losses seen from the U.S. oil and gas industry since October of 2014.

As oil and gasoline prices remain at multi-year lows, the duplicitous impact of lower oil prices on the U.S. economy continues to become ever more mottled. While the upside to lower prices has been a boon for consumers, the downside has not just been limited to the oil and gas industry.

As fears rise of bankruptcies from the energy sector, this has caused financial conditions to tighten, weighing on the broader economy. Hence, the positive impact of $140 billion of savings last year for the U.S. consumer due to lower gasoline prices is more than offset by the cutbacks in the oil patch. A stronger U.S. dollar, and its impact on commodities across the broad is stoking deflationary concerns also:

Related: Oil Companies Market Caps Crushed By Oil Crash

As the changing dynamics in the global crude market buffets prices around, the oversupplied nature of the market is leading to both opportunities and price divergences. The impending return of Iranian barrels in a region which is already entrenched in a battle for global market share means that the Dubai benchmark for crude has have fallen to its cheapest level versus Brent in one-and-a-half years. The biggest beneficiary of this? Asia. According to our ClipperData, Asia was the recipient of 64 percent of total crude loadings from the Persian / Arab Gulf last year.

(Click to enlarge)

While there has been much talk of dwindling foreign reserves in Saudi Arabia in recent months, China is in the same boat. Its foreign reserves are already at a three-year low, and expected to post a second consecutive record monthly drop, as policy makers intervene to prop up the yuan. Reserves are expected to have dropped by $118 billion in January, after falling $108 billion in December. 2015 was the first year since 1992 that Chinese foreign reserves shrank, and having dropped half a trillion dollars last year, they are down to $3.3 trillion…soon to be $3.2 trillion.

(Click to enlarge)

Finally, the chart below illustrates the changing global landscape for renewable energy projects. While the EU has seen its electricity generation from renewables increase from 14 percent in 2004 to 25 percent in recent years, it is now seeing slowing investment in the sector. Related: Why U.S. Shale Is Not Capitulating Yet

Meanwhile, investment in renewables in China continues to grow. China has now overtaken Germany to become the world’s largest consumer of solar power, with 43 gigawatts of installed generating capacity at the end of 2015. To put this in context, Chinese capacity is almost 10 GW higher than total electricity demand in the UK, and is up 53.9 percent on the prior year. Earlier in the week we took a look at rising renewable generation in the U.S.; while solar and wind power may be on the rise, investment in the sector is merely consolidating:

By Matt Smith

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