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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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Inventory Draws And Weaker Dollar Jolt Oil Prices

After being surprised by the voracity of the weekly oil inventory draw yesterday, oil prices have been rallying ever since. Today a move higher is being further encouraged by a weakening dollar in the aftermath of the Fed meeting (and amid some soft economic data). Hark, here are seven things to consider in oil markets today.

1) We had Abudi Zein's balloon analogy play out as expected in yesterday's EIA gasoline data, as the Colonial pipeline outage did indeed pressure PADD1 gasoline inventories lower, like pressing down on a balloon...

(Click to enlarge)

...while we saw gasoline inventories swell on the Gulf Coast. While the East Coast inventory draw was led by a 6mn barrel draw from the Southeast (PADD 1c), accounting for the majority of the 8.5mn bbl drop, the Gulf Coast experienced a 4.8 million bbl pop:

(Click to enlarge)

As we all know, all paths lead back to energy. And seemingly, all inventory explanations lead back to imports. Hence yesterday's chunky inventory draw can be explained away in large part by a 530,000 bpd drop in Gulf Coast imports on the prior week.

2) While we can see in our ClipperData that there has indeed been two crude loadings in the last 24 hours at the Libyan port of Ras Lanuf (onto Syra & Seadelta), we would caution against too much optimism of this becoming an ingrained trend. We also see signs of positive developments in Nigerian loadings this month too, although Qua Iboe loadings remain absent.

3) This week we've aready had comments from the Russian energy ministry that oil production is up to 11.75 million bpd, while Goldman Sachs projected back in July that Russian oil production would average 11.65 million bpd in 2018.

As the chart below illustrates, Russia is set to enjoy the highest growth in production across a number of countries in the coming years, led by a surge in drilling and investment by Rosneft at its brownfield sites.

In the last 18 months, Rosneft has been in the process of doubling its drilling rate in western Siberia. It drilled 750 wells in 2014, and is aiming for 1,700 next year. It is adopting fracking techniques and drilling horizontal wells too; a ramp up in capex by Rosneft (hark, 79 percent higher in 1H 2016 than in 1H 2014) is considered a wiser investment into brownfields than greenfield sites. Related: Bakken Halts Production Crash

4) The latest JODI data for July show Saudi Arabia's crude inventories are down to 281 million barrels, dropping 8 million bbls on the prior month, and now down 48 million bbls (or 14.6 percent) from their peak last October.

While it has been suggested that Saudi is drawing down its inventories to boost its exports, it appears rising production is filling the majority of this gap. Domestic production has increased by 0.45mn bpd since Q4 of last year (10.55mn bpd to July from 10.1mn bpd), while our ClipperData show that crude exports have risen by just over 0.5mn bpd over the same period.

While Saudi has been expecting domestic demand to increase this year, the latest OPEC report indicates total product demand has been contracting for the last four months to July - while oil demand from the Middle East in general is contracting on a year-over-year basis. IEA forecasts a drop in Saudi demand over the entire year.

(Click to enlarge)

5) The release of official Japanese data this week showing a minor increase in imports versus year-ago levels coincides with IEA's latest review of the country. The chart below shows the breakdown of oil across the various sectors of its economy. Transport accounts for 37.5 percent of oil consumption, while power generation accounts for nearly 12 percent (Japan is one of a handful of countries who still direct-burn crude for power generation).

Oil consumption has declined across all sectors, dropping by nearly 22 percent over the period from 2004 to 2014 (transport fell by 13 percent). Oil demand from power generation dropped by a third over the same period, although demand doubled in the aftermath of the Fukushima nuclear disaster in March 2011, as oil's share of the power generation mix increased from 10 percent to over 18 percent.

(Click to enlarge)

6) QOTD comes from Lynn Helms, director of the North Dakota Department of Mineral Resources. He used the surfing analogy of 'hang ten' to describe the current state of the North Dakota oil market: 'You’ve got to take on a long board, and you have to balance it perfectly. Then you just try to keep everything together. That allows you to hang ten. And that really looks like what the (oil) industry is doing right now.' Related: Natural Gas Producers In Colorado Have A Problem

The comments were in response to the state's latest production data, which ticked 0.3 percent higher in July to 1.03mn bpd. Nonetheless, Helms expects production to fall below 1mn bpd by year-end (not so gnarly, dude).

7) Finally, the chart below is pretty epic, highlighting the depth of Petrobras' cost-cutting. It has just unveiled a 25 percent cut to its previous capex plan, calling for $74 billion of spending through 2021. This compares to nearly $50 billion that was spent in just one year, in 2013:

(Click to enlarge)

By Matt Smith

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