Confidence And Cash Return To Oil

Friday, October 14 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. Solar threatens utilities

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- Solar installations are rising quickly, on the back of falling costs and federal incentives that have been extended through the end of the decade.
- Texas is expected to see 4 GW of solar installed by 2020, according to Bloomberg New Energy Finance.
- Up until now solar has been a marginal player, but the sharp rise in expected installations will cut into peak electricity prices, generating the most power during the middle of the day when electricity prices are at their highest.
- Solar could lower power prices by $2.58 per megawatt-hour during peak demand hours by 2020, BNEF says.
- This "peak shaving" presents an enormous threat to the profits of power generators in Texas. The deregulated market leaves generators with very little protection, so solar could put plants out of business.

2. Energy CO2 emissions at 25-year low

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- U.S. carbon dioxide emissions from the energy sector hit a 25-year low in the first six months of 2016, according new data from the EIA.
- CO2 emissions dropped to 2,530 million metric tons, the lowest level since 1991. The reasons for the decline are multiple.
- Mild weather led to soft demand - the U.S. had the fewest "heating degree days" since at least 1949 when record-keeping began. Total primary energy consumption was down 2 percent compared to the first six months of 2015.
- Moreover, the energy mix is changing. Coal consumption fell 18 percent in Jan-June 2016 compared to 2015. Meanwhile, electricity from renewable energy jumped 9 percent.

3. Yields on energy-related junk bonds come down from highs

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- Investors are no longer scared of energy-related junk bonds, with yields coming down on riskier energy debt, returning to levels not seen since before the oil price collapse two years ago.
- Average yields on the Bank of America Merrill Lynch energy bond index have declined from a high of 21 percent in February (when oil prices dropped below $30 per barrel) down to 7.3 percent as of mid-October.
- Falling yields come as oil prices have moved above $50 per barrel, in part sparked by the OPEC deal in Algiers.
- Earlier this year, the debt markets were largely shut off to riskier companies. But high-yield bond sales are starting to pick up, the FT reports. Since September there have been five bond offerings, representing more than half of 2016's $3.8 billion in high-yield debt sold.
- Investor sentiment continues to improve. The largest energy IPO since 2014 was held this week - Extraction Oil & Gas raised $633 million in an offering that exceeded expectations.

4. Gasoline stocks coming down

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- Gasoline stocks are still very high but have come down from the record heights of earlier this year. Inventories are only 3.5 million barrels above year-ago levels, Reuters reports, and are converging towards more normal levels.
- The spike in gasoline inventories earlier this year helped crash crude oil prices. But the unusually high inventories have also led to cutbacks in production.
- High inventories crashed refining margins - refineries are starting to cut back on processing, helping to reduce gasoline supply.
- At the same time, U.S. gasoline demand hit near-record levels over the summer, sucking up some of the excess.
- To top it off, U.S. exports of refined products increased as well.
- In short, a slightly tighter gasoline market is a good sign that the oil and refined products markets are adjusting.

5. More clean energy for less

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- Investment in renewable energy has not grown much in recent years - overall investment rose only from $318 billion to $329 billion between 2011 and 2015.
- But that seemingly pessimistic figure obscures the fact that renewable energy installations have soared from 87 GW in 2010 to 147 GW in 2015.
- In essence, developers have to spend a whole lot less to get a given GW of renewable power. Larger wind turbines, for instance, allowed costs to fall by 50 percent since 2009. Capacity factors are also rising.
- BNEF drew a line in the above graph between 2010 and 2011, a demarcation between what it calls the "spend more get more" period and the "spend same get more" period.
- Costs for renewable technologies continue to decline, ensuring that installations will continue their upward trajectory…even if investment dollars remain flat.

6. U.S. LNG depends on Chinese coal

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- In a sign of how interconnected global commodity markets are, Wood Mackenzie says that U.S. LNG exports to Europe largely depend on what happens to Chinese coal mines.
- China's coal mines are slowing and some have been shut down. That has pushed up coal prices not just in China, but around the world. European coal prices have climbed 54 percent so far this year.
- More expensive coal means that natural gas prices are also facing upward pressure in Europe. UK benchmark gas prices are up 34 percent in 2016.
- That in turn will make U.S. LNG more competitive, offering Europe an alternative. "The future of U.S. LNG over the next year will be set by the pace of response of coal markets in the U.S. and China," Noel Tomnay of WoodMac said in an interview with Bloomberg.
- China's coal production could fall 8.4 percent this year to 3.4 billion tons, WoodMac says, and then fall another 0.5 percent in 2017.

7. Cash flow and capex bottom out in 1st quarter, rebound in 2nd

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- Financial conditions for 46 publicly traded U.S. onshore oil producers improved in the second quarter, according to the EIA.
- Many companies saw improved operating efficiency, lower costs, and better balance sheets. Much of the improved performance, however, was due to a rebound in prices.
- Capex also increased in the second quarter, a sign that many shale companies grew more confident as prices rose. The second quarter marked the first quarter-on-quarter increase in capex since 2014.
- The rig count has rebounded as well, a sign that drilling is picking up momentum.

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