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Will Saudi Arabia Ditch The U.S. For Russia And China?

Will Saudi Arabia Ditch The U.S. For Russia And China?

Russia’s suggestion to Saudi Arabia…

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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Crude Holds At $40 On Weaker Dollar

After dipping briefly into thirty-dollardom yesterday, WTI is now using the $40 level as a trampoline. It is managing to muster a bounce today amid a dollar sell-off and a shift in focus towards tomorrow’s inventory report and a potential set of draws. Hark, here are five things to consider in oil markets today.

1) The Kuwaiti government is set to unwind costly fossil fuel subsidies next month by increasing local gasoline prices by as much as 83 percent. Kuwait is following in the footsteps of other Gulf Cooperation Council members (GCC) such as the United Arab Emirates in taking advantage of the oil price drop in the last two years to cut fossil fuel subsidies – it is the last of the six-country bloc to cut them. Nonetheless, it will still have the lowest rates in the GCC, and among the lowest globally. According to the IEA, fossil fuel subsidies amounted to $550 billion in 2013.

Kuwait has the world’s fifth largest sovereign wealth fund, with $592 billion in assets. In a similar vein to Saudi Arabia, its budget deficit is expected to be ~13 percent this year, and it too has started a bond sale program. Kuwait is also trying to diversify its economy, investing in global infrastructure projects, and cutting wasteful domestic spending.

In terms of Kuwaiti crude exports, our ClipperData show that over 70 percent of volumes head to five nations, with South Korea leading the charge with 19 percent of the total. The U.S. is the only non-Asian country in the top five, receiving some 11 percent of exports, or ~220,000 bpd:

(Click to enlarge)

2) According to a unit in the Russian Energy Ministry, Russia saw its domestic production post its 24th month of year-on-year gains in July, up 1.8 percent to 10.85 million barrels per day. Production peaked at a post-Soviet high of 10.91 million bpd in January. Output has been much more staunch than expected amid the oil price drop of recent years; a weaker ruble and a progressive tax system has helped to buoy it.

Looking ahead, estimates from Goldman Sachs see production rising to 11.65 million bpd by 2018. This view is predicated on ongoing tax breaks incentivizing low-cost production; Russia is seen as one of the world’s lowest-cost producers. Goldman’s view is in contrast to the IEA, who see production at 10.94 million bpd by 2018.

(Click to enlarge)

3) Yesterday we were taking a look at Indian crude oil demand, and how it is set to import more in the coming years; the same applies for LNG imports. As the chart below illustrates, Indian LNG imports are on the rise as it follows a similar tack to China – increasing its use of natural gas in the power generation mix.

With spot LNG prices to Asia dropping ~25 percent over the last year, India is looking to renegotiate the pricing method on its LNG supply contracts, and specifically with the world’s largest exporter, Qatar. Its LNG imports are up nearly 60 percent year-to-date through May, while domestic natural gas production has shrunk by 8 percent. India is looking to boost regasification capacity to 55 million tons by 2020 (6.4 Bcf/d), more than double the current level of 21 million tons (2.5 Bcf/d). Related: The World’s Biggest Oil Discovery Just Opened For Foreign Ownership

(Click to enlarge)

4) The chart below is from Wood Mackenzie (h/t @chigirl), highlighting how capex declines were seen across the board in Q2 versus last year. What is telling though, is how well Permian is holding up. Optimism about the Permian was echoed by Pioneer Resources CEO Scott Sheffield last week, who said ‘My firm belief is the Permian is going to be the only driver of long-term oil growth in this country. And it’s going to grow on up to about 5 million barrels a day from 2 million barrels,’ even in a $55 per barrel price environment, he added.

Related: The Energy Battlefield – New Tech Upending Decades Of Stable Markets

5) Finally, to jibe with the above chart is the one below from Rystad Energy. It shows how the average wellhead breakeven price has dropped by an average of 22 percent year-on-year from 2013 to 2016. Permian Midland has experienced the largest drop in breakeven prices, falling by 33 percent year-on-year from 2014 to 2016. The common theme across shale plays is that breakevens continue to drop.

(Click to enlarge)

By Matt Smith

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