Friday December 2, 2016
In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.
Let’s take a look.
1. OPEC reaches historic deal
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- In a Brexit or Trump-style shock to the markets, OPEC defied expectations with an agreement that actually has some teeth to it. The cartel will cut its collective output from just over 33.6 million barrels per day (mb/d) to 32.5 mb/d.
- Russia will also cut 300,000 barrels per day, although a Russian official said the cuts would take effect gradually. Non-OPEC producers will cut a combined 600,000 barrels per day as part of the agreement.
- The 1.2 mb/d cut from OPEC and the 0.6 mb/d cut from non-OPEC will lead to a global supply deficit as soon as early 2017. There are a lot of inventories that need to be worked through, but if the deal is actually implemented (and there are still question marks surrounding implementation from a group that has notoriously cheated on agreements), inventories will drawdown in earnest next year.
- Oil prices could rise to $60 per barrel in the first half of 2017, analysts say.
- But, investors should be cautious: a quick response from U.S. shale could add 800,000 barrels per day next year, according to Goldman Sachs, enough to kill off the price…
Friday December 2, 2016
In the latest edition of the Numbers Report, we’ll take a look at some of the most interesting figures put out this week in the energy sector. Each week we’ll dig into some data and provide a bit of explanation on what drives the numbers.
Let’s take a look.
1. OPEC reaches historic deal

(Click to enlarge)
- In a Brexit or Trump-style shock to the markets, OPEC defied expectations with an agreement that actually has some teeth to it. The cartel will cut its collective output from just over 33.6 million barrels per day (mb/d) to 32.5 mb/d.
- Russia will also cut 300,000 barrels per day, although a Russian official said the cuts would take effect gradually. Non-OPEC producers will cut a combined 600,000 barrels per day as part of the agreement.
- The 1.2 mb/d cut from OPEC and the 0.6 mb/d cut from non-OPEC will lead to a global supply deficit as soon as early 2017. There are a lot of inventories that need to be worked through, but if the deal is actually implemented (and there are still question marks surrounding implementation from a group that has notoriously cheated on agreements), inventories will drawdown in earnest next year.
- Oil prices could rise to $60 per barrel in the first half of 2017, analysts say.
- But, investors should be cautious: a quick response from U.S. shale could add 800,000 barrels per day next year, according to Goldman Sachs, enough to kill off the price rally.
- For now, though, the oil bulls are out in full effect.
2. Oil stocks already up on the year

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- Before the OPEC meeting, energy stocks were already up big on the year. The companies themselves could be still feeling the pain of low oil prices, but investors who timed their positions correctly could have enjoyed the largest annual increase in share prices since 2009.
- The Bloomberg World Oil & Gas Index, an index of 58 oil and gas producers, has added $490 billion to their market share in 2016, an impressive figure after two horrific years. In 2015 the industry lost $850 billion, and in 2014 it lost $720 billion.
- BP (NYSE: BP) and Shell (NYSE: RDS.A) have posted the largest gains since 1999.
- Still, it has been the E&Ps with some of the worst credit ratings that saw the biggest pop following the OPEC announcement. California Resources (NYSE: CRC), a California oil and gas company with a dismal credit rating of just Caa2, saw its share price rise by 50 percent on Wednesday.
3. Saudi Arabia still drilling

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- Saudi Arabia may be set to make cuts to its production levels, but it has sharply stepped up its pace of drilling over the past two years.
- The rig count in Saudi Arabia has jumped from 105 to 126 since 2014, whereas outside of North America the international rig count plunged from 1,382 to just 920, according to Reuters. The UAE and Kuwait, fellow OPEC members, were the only other countries that posted significant increases in their rig counts over the past two years.
- Saudi Arabia has a significant volume of latent spare capacity, and can throttle production up and down in a relatively short period of time.
- The increased drilling is an effort to maintain its market share, especially at a time of rising capacity in Iran, Iraq and Russia. Many Saudi oil fields are decades old and depleting.
- Riyadh might have agreed to cut production back temporarily, but higher rates of drilling are necessary to shore up the kingdom’s long-term position as the world’s most dominant oil player.
4. OPEC deal not great for tankers

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- OPEC’s deal to cut production to 32.5 million barrels per day is great news for producers, but bad news for tanker companies.
- Oil tanker companies make money on volume, so any reduction in trade will cut into business. Moreover, higher prices stemming from the decline in supply will hurt demand, which could further cut into tanker loads around the world.
- The reductions from OPEC could lead to a drop off of an estimated five oil tanker loads from the Middle East per week.
- At the same time, tanker rates for very large crude carriers (VLCCs) are dropping because of rising supply of ships.
- Bloomberg predicts that VLCC rates will average $31,000 per day in 2017, or about 15 percent lower than a prediction from a few months ago. Those rates are also down from the $40,000 daily average this year, and the $68,000 per day rates that the industry saw in 2015.
5. OPEC deal: bad for natural gas too

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- Oil prices are back above $50 per barrel, having surged more than 8 percent on Wednesday alone. That could bring back a lot of shale production in the U.S.
- But more drilling is not good news for natural gas prices, which have posted gains in recent months on falling supply.
- More drilling for oil will inevitably boost natural gas production, since gas is found in association with oil. “These guys will drill more, and you are going to get that extra gas at an inconvenient time,” Jason Schenker, president of Prestige Economics LLC, told Bloomberg. “It’s bearish for U.S. gas for the next three- to nine-month window.”
- The flip side is that LNG exporters will do better, since natural gas is a cost, not a source of revenue. LNG spot prices in Asia dropped this week (see chart).
- Golar LNG (NASDAQ: GLNG) saw its share price jump 16 percent after the OPEC deal was announced, although it pared back some of those gains on Thursday. Cheniere Energy (NYSE: LNG) saw its stock jump by 8 percent as well.
6. Natural gas prices up

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- The OPEC deal could spark higher natural gas production, but for now, U.S. natural gas prices are up, having made huge gains in recent weeks.
- Production is down on the year, dipping by a rather strong 5 percent since February, and rig counts have not rebounded in the same way that they have for oil.
- Natural gas storage levels reached record highs over the past year, but because demand is rising and production is flat or falling, storage levels have come back closer to the running five-year average.
- After a mild start to the winter, temperatures have dropped more recently across much of the U.S.
- Henry Hub prices have shot up from $2.60 per million Btu at the beginning of November up to $3.50/MMBtu at the beginning of December.
- That will have an array of ramifications – an uptick in gas drilling, an uptick in coal burning for power consumption, to name a few.
- The flip side is, as mentioned above, more production could be forthcoming, which could cap any further price gains.
7. U.S. shale producers positioned for rebound

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- Production costs across the U.S. shale patch have more or less declined by half since oil prices started to crater more than two years ago.
- Reuters reports that Dunn County, ND, has more than 2,000 square miles of Bakken oil that has a breakeven price at $15 per barrel. Breakeven costs across the Bakken averaged about $29.44 per barrel this year, sharply down from the $59.03 per barrel average in 2014.
- The much larger Permian Basin has similar figures, and drilling there never slowed down during the downturn.
- The Permian is now producing over 2 mb/d, meaning that West Texas is responsible for one fourth of U.S. oil production.
- Now that OPEC has moved to increase oil prices, shale drilling will come back with a vengeance, especially since the industry has succeeded in lowering production costs so substantially.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.