Bullishness Is Back In The Oil Patch

Friday July 28, 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. Saudi exports to the U.S. decline

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- Saudi Arabia has decided to cut oil exports to the U.S. in an effort to accelerate the market balancing.
- U.S. imports of Saudi crude used to routinely top 1 million barrels per day, but since June, the weekly figures have dropped sharply.
- The most recent data shows that U.S. imports of Saudi oil dipped to just 524,000 bpd, the lowest level in seven years.
- The idea is to send less oil to the U.S., which will force drawdowns in inventory levels. The weekly inventory figures have been some of the most important metrics that go into gauging the pace of rebalancing.
- There is also a psychological component. Because data elsewhere around the world is not as transparent as the U.S., by specifically targeting U.S. inventories, Saudi Arabia hopes to spark a more bullish sense in the market that rebalancing is underway.

2. Traders more bullish

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- Hedge funds and other money managers staked out one of the most bearish positions on crude in June, a meltdown of sentiment after the late-May OPEC announcement disappointed.
- But since the third week of June, speculators have rebought some more bullish positions on oil futures, recognizing that the selloff had gone too far.
- Short sellers continued to back out of their positions, and the net-long positioning rose by 21 percent to its most bullish in six weeks for the week ending on July 18.
- There are signs that the shale boom is slowing down. The rig count has flattened and the EIA revised down its projection for U.S. oil production in 2018 from 10.01 mb/d to just 9.9 mb/d.
- "We are seeing a little bit of fresh buying, but not really a confident flow that would reflect an expectation that prices will continue to work higher," he said.

3. Big Oil sees profits rise

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- Second quarter earnings for the oil majors are expected to be significantly improved compared to the same quarter in 2016.
- Royal Dutch Shell (NYSE: RDS.A) reported profits on Thursday of $3.6 billion, or more than triple from a year earlier.
- Bernstein estimates that the seven largest oil companies will see their cash flow jump by 42 percent.
- Oil prices were up in 2Q2017 compared to a year earlier, but the cost-cutting campaigns are also a big reason for the improvement. Going forward, the oil majors, for the most part, are expected to hold onto their conservative approach, expecting oil prices to remain flat for the foreseeable future.
- Shell's CEO said oil prices could remain "lower forever."

4. Anadarko slashes spending

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- While the oil majors are expected to see improvements, not everyone is doing well. Anadarko Petroleum (NYSE: APC) reported a wider-than-expected loss for the second quarter, a performance that led to a brief plunge in its share price.
- Anadarko also said that it would cut 2017 spending by $300 million, a surprise move that speaks volumes about the sudden slowdown coming in the shale industry.
- Halliburton (NYSE: HAL) and Schlumberger (NYSE: SLB) also told investors that the shale drilling rebound is running out of steam.
- Anadarko's share price rebounded when investors found out about the cuts to spending, suggesting that Wall Street is beginning to prioritize restraint and prudence over growth.
- "We sincerely believe that the volatility of the current operating environment requires financial discipline," Anadarko's CEO Al Walker told analysts on the conference call. "As I have said many times, pursuing growth without adequate returns is something we will avoid."

5. Shell sees EV revolution coming quickly

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- Royal Dutch Shell's (NYSE: RDS.A) CEO Ben van Beurden made headlines this week when he said that he would be purchasing an electric vehicle, endorsing the very trend that could undermine his company's business.
- He said that EVs will take over the transportation industry, which will ultimately lead to peak oil demand. That will mean oil prices remain "lower forever."
- "We need to be at a much higher degree of electric vehicle penetration -- or hydrogen vehicles or gas vehicles -- if we want to stay within the 2-degrees Celsius outcome," van Beurden said.
- As a result he has Shell trying to adapt to a world of oil permanently at $50 per barrel, which means greater investments in natural gas and renewables. He predicts the world will hit peak oil demand in the early 2030s or earlier.
- Bloomberg New Energy Finance projects EVs will capture a third of the auto fleet by 2040, erasing 8 mb/d of oil demand. And by 2038, EVs will surpass the sales of the internal combustion engine.

6. Natural gas demand in U.S. drops

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- Natural gas demand typically hits a seasonal peak in July and early August, as millions of Americans crank up the AC.
- The volume of gas used in electricity hit a daily high on July 20, hitting 41 billion cubic feet.
- But the power burn between April 1 and July 25 averaged just 27.1 Bcf/d, or about 7 percent lower than for the same period a year earlier, according to the EIA.
- However, natural gas prices have also been substantially higher this year. Over that nearly four-month period between April and July, Henry Hub spot prices averaged $2.27/MMBtu in 2016, but $3.03/MMBtu in 2017.

7. U.S. oil production to hit all-time record high in 2018

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- The EIA forecasts that U.S. oil production will rise to 9.3 mb/d in 2017, a gain of 0.5 mb/d compared to 2016.
- But production will continue to soar, rising to 9.9 mb/d next year, surpassing the previous record high of 9.6 mb/d set in 1970.
- Most of the gains will come from the Permian Basin in West Texas, which is expected to add 515,000 bpd in 2018.
- A handful of offshore projects in the Gulf of Mexico, which were planned years ago, will come online and add 344,000 bpd.

That's it for this week's Numbers Report. Thanks for reading, and we'll see you next week.