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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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Choppy Oil Markets Await Oil Majors’ Earnings

The mighty, mighty Ella Fitzgerald was born ninety-nine years ago today, and accordingly the crude oil market is looking ‘bewitched, bothered and bewildered‘, being pulled in 17 different directions – flipping from losses to gains and back again. Hark, here are six things to consider in oil markets today:

1) WTI has rallied some 65 percent in the last couple of months, with the rally in part ignited by the unwinding of a record speculative short positions. The latest CFTC data show that short positions continue to be closed, while speculative long positions are seeing continued interest; longs increased by 4.8 percent last week, while shorts tumbled by 19 percent. Hence, we find ourselves at the highest net long position since last May:

(Click to enlarge)

The latest ICE data show that financial positioning in Brent is even more bullish, with net longs at a record of 403 million barrels, up 13 percent last week.

2) Although we have an impending onslaught of earnings and economic data releases, it has thus far been a slow start to the week. The main release of note overnight was been German business sentiment data; it disappointed across the board, for both current conditions and for a forward outlook. New home sales has been the only release of note in the U.S., and was also disappointing. Related: The Real Reason Saudi Arabia Killed Doha

The fun ramps up from here, however, as we get durable goods tomorrow, and Federal Reserve interest rate rhetoric (but no interest rate hike) on Wednesday. All the while, we are in full swing for quarterly earnings season, with BP, Total, Exxon and Chevron all announcing results this week. As we said on Friday, brace yourself

3) A piece from the WSJ this weekend highlights how U.S. oil producers are increasingly hedging their exposure, and at levels they rejected a year ago because they considered them too low. Despite this uptick, U.S. producers have only hedged ~36 percent of their expected output for 2016; historically, they have hedged closer to half their production.

Pioneer Natural Resources, one of the most active hedgers, has taken advantage of the recent rally to place more hedges. It has now covered 50 percent of its 2017 production, up from 20 percent.

(Click to enlarge)

4) The valuation of Saudi Aramco has yet to be completed, but is expected to be valued between $2 and $2.5 trillion, according to Prince Mohammed bin Salman. An initial public offering for <5 percent of the company is expected next year, and will be one of the biggest initial public offerings in history. This makes sense, given Saudi Aramco’s oil reserves are roughly 260 billion barrels – nearly ten times the size of the world’s largest listed oil company, Exxon Mobil; it also produces three times as much oil as them. Related: Horizontal Land Rig Count Summary 22nd April 2016

5) Oil and gas mergers are expected to pick up this year, as financially constrained companies put themselves up for sale to avoid bankruptcy. As the chart below illustrates, oil and gas mergers fell in 2015 by 2.5 percent to $469 billion, from a record $481 billion in 2014.

One thing that may derail such a pick-up in mergers is the renewal of credit lines in the oil and gas sector – it’s been an uneventful redetermination period thus far. Illustrated by companies such as Cheasapeake in recent weeks, even those who are highly leveraged are managing to get their credit lines renewed. And even where borrowing bases are being adjusted lower, they are not being cut by more than expected.

(Click to enlarge)

6) Finally, after an exceptionally weak start to the year, our ClipperData show Chinese waterborne crude imports are going nuts. A rebound in the last few months means that imports are up year-to-date compared to last year, while April’s import volumes are thus far at a record pace. Teapot refiners continue to show a voracious appetite for crude imports, although broad-based buying this month points towards a Chinese economy which is potentially turning a corner: Related: Can This Pipeline Unlock East-African Oil Potential?

By Matt Smith

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  • AlexHK on April 26 2016 said:
    Mr. Smith,

    how do you reconcile points 1) and 3) of this summary? (Which I otherwise find usually informative, if a little short-biased.)
    So we have all the producers hedging (which I presume adds short positions), and yet the short positions are "tumbling". I am probably underestimating the structural complexity of producer hedges, but at the end of the day, they still offer to sell barrels at the current price of a given future.

    How is the distinction made between a "speculative" long, and a need-based hedge (of, say, an airline)?
    Who says the producers are hedging for non-speculative purposes exclusively? Also, companies that barely made money at 100 USD WTI (most of US Shale), even figuring in significant "cost improvements" (which will prove fleeting if the market tightens, in as far as those improvements were based on squeezing suppliers), would be ill-advised to lock in 55 USD WTI (except as a short term move to strengthen balance sheets during the current credit redetermination phase.)

    Do I sound as if I was long myself? You betcha.

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