• 4 minutes Drone attacks cause fire at two Saudi Aramco facilities, blaze now under control
  • 7 minutes China Faces Economic Collapse
  • 13 minutes Oil Production Growth In U.S. Grinds To A Halt
  • 15 minutes Iran in the world market
  • 18 minutes Ethanol, the Perfect Home Remedy for A Saudi Oil Fever
  • 2 hours USA Wants Iran War -- Shooty Shooty More
  • 3 hours Never Bring A Rapier To A Gun Fight
  • 44 mins Collateral Damage: Saudi Disruption Leaves Canada's Biggest Refinery Vulnerable
  • 6 hours Bahrain - U.S.: Signed Deal To Buy Patriot Missiles
  • 8 hours One of the fire satellite pictures showed what look like the fire hit outside the main oil complex. Like it hit storage or pipeline facility. Not big deal.
  • 13 mins USA : Attack came from 'Iranian soil'. Pompeo to release 'evidence'.
  • 7 hours Trump Will Win In 2020 And Beyond..?
  • 19 mins Yawn... Parliament Poised to Force Brexit Delay Until Jan. 31
  • 10 hours Wonders of US Shale: US Shale Benefits: The U.S. leads global petroleum and natural gas production with record growth in 2018
  • 8 hours How OPEC and OECD play their role in setting oil price in light of Iranian oil sanction ?? Does the world agree with Iran's oil sanctions ???
  • 3 hours Aramco Production
  • 6 hours Democrats and Gun Views

Good News For Currencies As The Supply Glut Looks To Be Easing

Friday, April 1, 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. Global stocks moving with oil

 

(Click to enlarge)

- Global stock markets typically trade inversely to oil prices, with cheap fuel boosting consumer economies and expensive energy doing the opposite. But more recently, there has been a positive correlation between global equities and oil prices, a correlation that doubled from the end of 2014 to the end of 2015, continuing into this year.
- Why the sudden departure from the past? The IMF says it is because the industrialized world has interest rates near zero, which is different from previous downturns in oil prices.
- In the past, lower prices would cause some deflation, and central banks would respond with lower interest rates, thereby boosting growth. This time around, central banks cannot do that. So, as prices drop and interest rates stay the same, the effect is a higher real interest rate, stifling much of the benefit of low oil prices.
- Thus, the IMF concludes that the economic benefit, counter intuitively, may only come as oil prices start to rise, making real interest rates fall.

2. Oil majors only replace 75% of reserves in 2015

 

(Click to enlarge)

- The seven oil majors only replaced three-quarters of the oil that they produced in 2015. For many, it has been more than a decade since the so-called reserve-replacement ratio has dipped below 100 percent.
- ExxonMobil (NYSE: XOM), the largest publically-traded oil company in the world, only replaced 67 percent of the oil it produced last year. BP (NYSE: BP) only replaced 61 percent. Statoil (NYSE: STO) only replaced 55 percent.
- The reserve-replacement ratio is a metric used for investors to determine a company’s long-term prospects. A ratio below 100 percent suggests that they are failing to make new discoveries.
- Still, some of the loss is due to accounting rules. With low oil prices, some reserves are no longer considered to be “proved.” Reserves will rise again when prices do.

3. Oil demand rising faster than industrial production

 

- Credit Suisse made headlines this week when it issued a bullish outlook for oil markets. The investment bank says that demand is “alive and well,” despite a fourth quarter slowdown.
- While oil demand is typically correlated with industrial demand, oil consumption is rising more today because of passenger vehicles than heavy industry.
- Slow industrial production has convinced many analysts about the fragility of the global economy, but Credit Suisse says emerging market middle classes are doing well, fueling consumption of oil as they acquire new vehicles.
- "We project in fact that oil demand should continue to outperform historic correlations with industrial production,” Credit Suisse wrote in a recent report.
- Oil could hit $50 as soon as May, as demand continues to grow at more than 2 percent on an annualized basis.

4. Passenger vehicles driving China’s oil demand

 

- As mentioned above, passenger vehicles are increasingly driving oil markets, loosening the connection between oil and the industrial sector.
- Since 2010, China owes 65 percent of its oil demand growth to its ballooning vehicle fleet.
- But that doesn’t mean demand will keep growing. Deutsche Bank says that oil demand in China’s transportation sector could slow and even start to decline by 2024.
- Deutsche Bank argues that energy forecasters such as the EIA, IEA, and even oil companies like BP are over predicting China’s vehicle growth rate and under predicting its fuel efficiency gains.
- China’s slowdown plus its efficiency gains could mean that its rate of demand growth could halve between 2016 and 2020.
- If true, that would have global repercussions. Global oil demand growth could slow from an average of 1.1 mb/d each year to just 800,000 barrels per day each year.

5. Oil speculators pile into net-long positions

(Click to enlarge) 

- Oil speculators deserve a lot of credit for the price swings over the past year. They crowded into record short positions in late 2015 and early 2016, pushing oil down below $30 per barrel.
- Now, the tide has reversed. The rally since February has been driven by bullish speculation. Hedge funds have taken a combined net-long position equivalent to 572 million barrels as of late March, the highest level in almost a year.
- That has contributed to a 50 percent rally in oil prices in less than two months.
- The danger is that the net-long rally is not connected to the fundamentals. Just as we saw too many short positions unwind rapidly in February, fueling a rally, we could see the unsustainable bullish positions reverse. Consequently, unless something significant occurs in the physical market – a sharp drawdown in inventories or a substantial contraction in production – speculators could drive oil prices back down.
- In a recent report, Barclays warned that “a wave of investor liquidation” could cause oil prices to slide back down into the low $30s.

6. Average well costs decline

(Click to enlarge) 

- The U.S. shale industry continues to make improvements on drilling costs. The cost to drill the average well in 2015 was 25 to 30 percent lower compared to 2012. Last year’s costs were also 7 to 22 percent below 2014 levels.
- Deeper wells and longer laterals allowed more oil and gas to be produced from a given well, lowering costs per production.
- Lower costs and improved drilling techniques allowed production to rise to a peak of 9.6 mb/d in 2015, despite the collapsing rig count.
- The U.S. had 1,931 oil and gas rigs in September 2014. That figure has utterly collapsed to just 464 as of late March. Nevertheless, oil production is only down by about 600,000 barrels per day since April 2015, evidence of the industry’s success at drilling efficiency.

7. The Dollar-Oil connection

 

- Oil prices are a story of supply and demand, but much of the short-term fluctuations are heavily influenced by the performance of the U.S. dollar. Oil is priced in dollars, so a stronger dollar pushes down demand (and prices), while a weaker dollar pushes up demand (and prices).
- With concerns over the global economy, particularly in late 2015, investors fled to safety in the dollar. Weak oil prices sparked concerns about emerging market currencies, further diverting capital flows out of emerging market currencies and into the dollar.
- The strength of the dollar, in turn, crushed prices even further.
- More recently, the dollar has fallen back. That has, not coincidentally, occurred at a time when oil prices have posted gains.
- The more dovish stance from the Fed in 2016 is adding fuel to that fire. Just this past week, Fed Chair Janet Yellen backed off previous pledges to hike interest rates. That is bullish for oil this year.

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




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play