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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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El Niño Could Turn Into Worst Nightmare For U.S Natural Gas Producers

We have now tumbled into fall, although you wouldn’t know it by looking at the weather forecast. As NOAA’s 8-14 day outlook illustrates, we are set for above-normal conditions for the first week of October across, ooh, basically the entire US. This morning’s natural gas storage report is expected to yield an injection well above the 5-year average of 83 Bcf, and weather forecasts point to further solid injections in the weeks to come.

Last week we took a look at what an El Niño meant for the coming winter as WSI issued its winter weather outlook. WSI is predicting the strongest El Niño in 65 years, which ‘should drive warmer-than-normal temperatures across much of the northern U.S., as the polar jet stream weakens and lifts northward‘. Accordingly, WSI projects natural gas demand this winter to be 10% lower than the previous one.

With this in mind, and with storage levels already 16% higher than last year, and 4% higher than the five-year average, it provides some color as to why the January contract (aka the bleak mid-winter) is currently at a 16-year low: Related: Is This The Bottom For Oil Prices?

(Click to enlarge)

There is a somewhat more frosty reception being felt across financial markets today, with Japanese equities opening for the first day this week, and promptly getting walloped. This baton of risk aversion is being passed from continent to continent, as Europe sells off and the US looks down.

Crude prices were finding some solace in a rising euro earlier in the day, with the European Central Bank downplaying the need for further stimulus. But as the outlook gets bleaker for broader markets, risk aversion is dragging crude lower. On the economic data front, we had a weaker-than-expected manufacturing print from Japan (which further greased the wheels for an equity sell-off).

Onto Europe, and German business confidence was the opposite of its compatriot indicator, the ZEW, by showing a weak current assessment but improving expectations (the ZEW was the other way round). Onto the US, and durable goods were relatively in line across the board, while weekly jobless claims came in a little better than expected at 267,000, but slightly higher than last week. Related: “Walking” Oil Rigs Can Make Drilling Faster, Cheaper, Safer

Fears are escalating in the oil patch about an impending credit crunch amid falling investment. Oil producers are set to see credit lines cut by an average of nearly 40%, as the majority of companies see their credit lines shrink due to the revaluation of assets (a twice-yearly phenomenon). This comes at a time when upstream investment is also shrinking in response to lower oil prices. The below chart from EIA highlights that investment levels in the coming years will be significantly lower than the 10-year annual average, due to the drop in prices (the crude oil first purchase price is adjusted for inflation).

(Click to enlarge)

Finally, we discussed a couple of days ago how Singapore is seeing record stockpiles of fuel oil finding its way onto tankers amid exceptionally strong refining runs. We are seeing a similar tale emerge for diesel exports from China, as refiners keep on refining amid slower demand. According to the General Administration of Customs, diesel exports have risen 77% year-on-year to reach a record 175,000 barrels per day in August. Strong refining runs are endorsed by what we see in our #ClipperData, with Chinese oil imports year-to-date 14% higher than last year, rising to meet this ongoing demand. Related: Can Brazil’s Oil Sector Make The Transformation Needed To Survive?

(Click to enlarge)

By Matt Smith

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