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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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Canadian Oil Benchmark Falls Off A Cliff

Canadian Oil Benchmark Falls Off A Cliff

Third time is a charm as China has reset its currency peg for a third day on the trot. The law of diminishing returns means markets are somewhat insulated from the fear factor of a third day of currency devaluation, while financial markets put on their rose-tinted glasses and buy in (literally) to the prospect that this latest attempt from China to stimulate its economy just might work. Hence, global equity markets are looking perky, the dollar is seeing some strength, and crude prices are getting pressured lower once more.

U.S. economic data returns to the fore, with weekly U.S. jobless claims coming in just shy of consensus at 274,000 (but no biggie), while tales of retail sales come in better than expected at +0.6%, versus 0.5% consensus. (Go-go gadget rate hikes!).

The big conundrum the crude complex is having to deal with here in the U.S. is refinery and pipeline issues in the Midwest. An outage at the Whiting refinery, the largest in the Midwest, could keep 240,000 barrels a day offline for a prolonged period, stoking fears that Cushing stocks could get filled to the brim in the coming months. Meanwhile, the loss of demand for Western Canadian Select crude (see below) sees its price plummet to the low $20s – only worsened by a pipeline leak on the Flanagan South in Missouri (although this is expected to re-start today).

While we have seen the lagged impact between the falling rig count and the ripple effect to U.S. production play out rather well over the last nine months, North Sea production highlights that investment periods work over a much longer time-frame. Hence, as investment in the North Sea has picked up over the last four years to participate in an oil market predominantly spending its time in triple digits, output has risen for two consecutive years (hark, first time since 2000)…..only to be greeted by oil in forty dollardom. Output is likely to turn south once more in the coming years. Related: Some Light At The End Of The Tunnel For Oil?

As Canada’s crude benchmark, Western Canadian Select (WCS), drops below C$30 (~$23) a barrel, here are some alternatives that you can buy in Alberta for the same amount of money: Related: The Best Buys In Nanotech For Energy Investors

(Click to enlarge) Related: Bullish Bets On Oil Go Sour

The recent precipitous price drop in WCS is not only due to the global rout in oil, but has been exacerbated by a combination of rebounding production after wildfires in the spring, and the aforementioned shutdown of key refineries and pipelines in the U.S. Midwest.

Meanwhile, the price of Bakken oil has dropped to $30. While break-evens in the original gangster of shale plays run the gamut, apparently half of its wells can generate positive returns at this price level. EOG Resources (largest shale driller) says it can make a 30% return on $50 oil in its best plays, while Whiting Petroleum Corp. (largest Bakken producer) says it is ready to grow production above $40.

By Matt Smith

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