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Big Oil’s Nightmare Is Coming True

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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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Crude Sinks As Jobs Report Propels Dollar Even Higher

We reach the penultimate unemployment release of the year, with a lot hinging upon this report. The headline numbers – ironically 154 years after the birth of basketball inventor James Naismith – mean an interest rate hike in December is increasingly becoming a slam dunk.

271,000 jobs were apparently created last month, a country mile away from the expectation of 180,000 (and not even hinted at by Wednesday’s ADP report). The unemployment rate has ticked lower to 5.0 percent, a level not seen since May 2008 (hark, below). Even average hourly earnings ticked up by 0.4 percent in October, indicating the presence of the panacea for disinflation. In summary, the Fed couldn’t have wished for a better report if they were looking for encouragement to raise rates next month.

As we discussed yesterday, the prospect of higher interest rates will propel the U.S. dollar higher, providing headwinds for a crude rally. Hence, as the U.S. dollar rips higher after the surprisingly strong unemployment report…crude is sinking once more. Related: Oil Markets Shrug Off Supply Disruptions In Libya And Brazil

(Click to enlarge)

Unemployment rate, percent (source: investing.com)

Flipping to overnight action, and fun and games were kicked off by Bank of Japan’s Governor Haruhiko Kuroda, who said further potential stimulus measures could be forthcoming should China’s slowdown spur on deflationary pressure.

Across to Europe, and German industrial production in September contracted for a second consecutive month, dropping -1.1 percent versus the expectation of a rebound of 0.5 percent. The UK also saw a worse-than-expected print at -0.2 percent (MoM), while Spain bucked the trend, coming in better than consensus. Brazilian woes continue, with inflation ticking up to 9.93 percent (YoY), a new 15-year high. Related: Is Iran Opening A “Secret Passage” To Asia For Russian Crude?

The below graphic illustrates how low oil prices are weighing heavy on the number of new oil projects being launched (NB, excluding unconventional oil and gas drilling in the U.S.). This huge drop in new projects is causing oil services companies to slash costs and get increasingly more competitive for a lesser number of projects. This is no better exemplified than by Schlumberger, who has seen profits halved in Q3 as revenues were slashed by a third (versus the prior year).

Finally, despite weaker trade between Russia and Japan, Russian crude exports to Japan have rebounded in recent months. Nonetheless, they are still below last year’s pace, dropping to average 242,000 barrels per day so far this year through October. Related: Oil Sands Still Face Pipeline Problems

Our #ClipperData show that Saudi Arabia is seeing its share of the Chinese market drop, as countries such as Russia increasingly compete for market share. Saudi Arabia is, however, seeing its exports to Japan increasing this year, while total Japanese oil imports edge lower. This underscores how the competitive landscape for producers – just as mentioned above for oil services companies – continues to intensify.

By Matt Smith

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