Friday May 12, 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. Hedge funds most bearish since pre-OPEC deal
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- Hedge funds and other money managers continued to flee from their bullish bets in the first week of May, just ahead of the sharp selloff on May 4.
- They reduced their net-length exposure by 20 percent, according to the latest CFTC data.
- Oil investors are now at their most bearish position since OPEC announced its deal in late November.
- While that is an incredibly pessimistic makeup, it doesn’t mean that oil prices will fall further. In fact, the liquidation of long bets could open up space for buying up crude futures.
- “We are moving toward a positioning where these money managers are no longer over-invested,” Tim Evans, an analyst at Citi Futures Perspective in New York, told Bloomberg. “This opens up the potential for them to start buying again.”
- So, paradoxically, the recent downturn in oil prices and the gloom from oil traders could sow the seeds of the next rally.
2. Record Arctic drilling
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- Arctic drilling might be dead in the U.S., but the oil industry is set to…
Friday May 12, 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. Hedge funds most bearish since pre-OPEC deal

(Click to enlarge)
- Hedge funds and other money managers continued to flee from their bullish bets in the first week of May, just ahead of the sharp selloff on May 4.
- They reduced their net-length exposure by 20 percent, according to the latest CFTC data.
- Oil investors are now at their most bearish position since OPEC announced its deal in late November.
- While that is an incredibly pessimistic makeup, it doesn’t mean that oil prices will fall further. In fact, the liquidation of long bets could open up space for buying up crude futures.
- “We are moving toward a positioning where these money managers are no longer over-invested,” Tim Evans, an analyst at Citi Futures Perspective in New York, told Bloomberg. “This opens up the potential for them to start buying again.”
- So, paradoxically, the recent downturn in oil prices and the gloom from oil traders could sow the seeds of the next rally.
2. Record Arctic drilling

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- Arctic drilling might be dead in the U.S., but the oil industry is set to drill a record number of wells this year.
- Most of the action will take place in Norway’s Barents Sea. Statoil (NYSE: STO) and a few other European companies are leading the way, with 15 wells expected to be drilled in 2017, an all-time high in Norway’s Barents Sea.
- Unlike Alaska, the Barents Sea is mostly ice-free, because the Gulf Stream brings warmer waters north. That allows for a much longer drilling season. Shallow waters also make things easy.
- As a result, breakeven costs in the Norwegian Arctic are much lower than in Alaska.
- One project coming up in the next few months stands out: Statoil’s Korpfjell project, potentially Norway’s largest oil field to be drilled in decades.
3. Oil majors’ debt still sky-high

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- The first quarter of 2017 was the best in years for the oil majors, all of whom posted strong improvements in cash flow and profitability. Some even whittled away at their debt levels.
- But the collective debt pile for the world’s largest oil companies remains enormous.
- The five largest companies – ExxonMobil (NYSE: XOM), Royal Dutch Shell (NYSE: RDS.A), Chevron (NYSE: CVX), Total (NYSE: TOT) and BP (NYSE: BP) saw their combined debt double to $210 billion between 2014 and 2016.
- Higher cash flow helped them trim that mountain over the past two quarters, but lingering debt will prevent growth in the years ahead as spending will remain in check.
4. New Permian pipelines could boost production

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- The drilling boom in the Permian Basin has pipeline operators struggling to keep up.
- In the past, a shortage of pipeline capacity in West Texas led to steep discounts for Permian crude. At its worst, Permian oil sold for a $20 per barrel discount to WTI in Cushing, Oklahoma in 2014.
- The discount vanished in 2015 because of new pipelines, but the discount opened up again more recently to a modest $1 per barrel. That is the result of the drilling frenzy underway right now in West Texas.
- The discount won’t reach the pre-2015 levels because of all the new pipeline capacity. Also, more pipelines are under construction now and will come online soon, which should lead to a narrowing of the discount.
- Enterprise Product Partners is building a 450,000 bpd pipeline that will come into operation later this year.
5. Shale revolution 2.0

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- The IEA says that we are in the midst of a second shale gas revolution (the first one being the original boom in shale gas production in the U.S.).
- This second shale revolution will come in the form of LNG. Since 2009, the IEA says, the U.S. has added the equivalent of two Qatars worth of natural gas to the global gas balance. But over the next five years, another 130 billion cubic meters of LNG export capacity will come online, most of which will come from the U.S. and Australia.
- That will result in a global gas market that is increasingly traded in the form of LNG rather than just through pipelines. By 2040, more than half of global gas volumes will trade in LNG, up from just 26 percent in 2000.
- The implications are profound: more LNG capacity will lead to shorter contracts, a larger spot market and lower prices. The LNG market will increasingly resemble the market for crude oil.
- LNG will also be oversupplied for the better part of a decade. But the market could tighten by the end of the 2020s unless new supply is planned soon.
6. OPEC sees much stronger shale response than it originally thought

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- OPEC dramatically revised up its forecast for U.S. shale growth in its latest report, a grim assessment for a group hoping for higher oil prices.
- OPEC projected an increase in U.S. shale by 950,000 bpd by the end of the year, a massive upward revision by 370,000 bpd compared to its previous projection. It is also four times larger than what the group predicted last November.
- The above chart shows OPEC’s changing projection for U.S. shale growth over time. Last summer, OPEC expected that U.S. shale would actually decline in 2017. As recently as January, the group only saw U.S. shale expanding by some 100,000 bpd.
- Now OPEC sees almost a 1 mb/d increase. Suffice it to say that OPEC is disappointed that its cuts only seem to have made more room for U.S. shale drillers.
7. Investors should go small or big, not in between

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- Bloomberg Gadfly argues that investing in the mid-sized majors, or mini-majors, seems to be out of fashion in today’s market. These companies, such as the $30 billion Anadarko Petroleum (NYSE: APC), or the $16 billion Hess (NYSE: HES), have offered some of the worst returns this year.
- The reason is that small shale drillers offer investors a pure-play bet on shale. And when they payoff, they payoff big. If investors expect shale to rebound strongly, or they expect oil prices to rise, rolling the dice on a small company is smart.
- If investors are more cautious, or want diversification, or just want dividend payments, they might as well go for the supermajor ExxonMobil (NYSE:XOM).
- The mini-majors offer the worst of all worlds – a smaller dividend and less safety than the supermajor, without much upside from shale because of their large size.
That’s it for this week’s Numbers Report. Thanks for reading, and we’ll see you next week.