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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 Could Rise Further On Stronger Asian Crude Demand

With markets closed today to witness Martin Luther King Jr. Day, prices are not surprisingly rather subdued amid quiet electronic trading. Nonetheless, fun and games will ramp up from tomorrow, with OPEC's monthly oil report out on Wednesday, swiftly followed by the IEA's monthly oil market report on Thursday - along with the delayed EIA weekly report. That said, hark, here are five things to consider in oil markets today:

1) The chart below highlights how Asia Pacific oil demand is expected to grow by 800,000 - 900,000 barrels per day this year and next, while production from the region could shrink by as much as 330,000 bpd over the same period.

This shortfall of over 1 million bpd means the gap betwixt consumption and production continues to widen, projected to be a mammoth 27 million bpd this year. As the gap widens and prices rise, the region is projected to spend over $500 billion on importing oil this year.



2) We can see in our ClipperData that flows into the Asia Pacific region have risen versus year-ago levels for eleven of the last twelve months, rising by an average of 1.33 million bpd over the period.

For the last four months of the year, however, we have seen imports averaging 2.1mn bpd higher than year-ago levels. As OPEC producers have put as much as possible onto the global market ahead of a coordinated production cut, the Asia Pacific region has been a key beneficiary:

(Click to enlarge)

3) With the oil market entering 2017 with prices above $50/bbl, having virtually doubled from the February lows of last year, optimism is creeping back into the industry, manifesting itself in higher capital expenditure. According to Wood Mackenzie, upstream capex will increase in 2017 for the first time in three years.

Approvals this year are expected for the development of more than 20 oil and gas fields, which is more than double the number seen last year. A third of these fields are expected to be deepwater projects, while the U.S. is expected to invest $61 billion into onshore projects (think: shale).

Nonetheless, upstream capex in 2017 is set to remain 40 percent below 2014's level:

(Click to enlarge)

4) With oil prices back in the fifties, U.S. production is on the rise again, trying to clamber back above 9 million bpd. But as oil prices rise, the cost of oil-field services are set to rise also. Cost savings for producers over the last few years have come at the expense of oil services companies, and now these companies are looking to raise their prices again. Related: The Top 5 Places To Work In U.S. Oil And Gas

As the graphic below illustrates, higher costs - such as labor and supplies - could significantly boost the breakeven in key fields to above current price levels:

(Click to enlarge)

5) Finally, although long-term forecasts are to be taken with a pinch or two (or ten) of salt, the below chart provides some interesting insights into the prospects for Asian LNG demand growth.

Total global LNG consumption is projected to be 422 million tons in 2030, almost two-thirds higher than last year's level. While oversupply is expected to persist through the rest of the decade as new projects come online, a lack of FIDs (final investment decisions) betwixt now and the end of the decade means there is the potential for this oversupply to flip to a shortage by mid-next decade.

Nonetheless, the two leading global consumers of LNG, Japan and South Korea, are expected to see waning demand over this period.

(Click to enlarge)

By Matt Smith

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