Middle East Oil Producers Finally Breaking Even

Friday April 21, 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. Private equity going big in U.S. shale

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- Private equity raised $19.8 billion to put into shale investments in the first quarter of this year, triple the amount raised in the same quarter in 2016, according to Reuters.
- The first quarter of 2017 has been the largest in years for total capital raised from private equity.
- "There is a ton of private capital to invest in the U.S. oil industry," Gerrit Nicholas, co-founder of private equity fund Orion Energy Partners, told Reuters. Orion says it could make money on shale investments even if oil prices drop by another $10 per barrel.
- Big banks and other major lenders are also optimistic about the rebound. The current credit redetermination period is expected to be a generous one for shale drillers, with credit lines expected to be enlarged for many companies.

2. Middle East oil producers to break even

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- The breakeven prices for Middle East and Central Asian oil producers declined a bit over the past three years, but low oil prices blew a hole in many government budgets.
- The recent uptick in oil prices likely means that as a group, government budgets will break even this year for the first time in nearly three years.
- Moreover, according to Goldman Sachs, U.S. shale has reduced long-term uncertainty regarding oil prices. The flexibility of U.S. shale will allow marginal output to come online when prices rise, preventing price spikes. Similarly, output will go offline when prices drop too low.
- The more stable long-term price forecasts will allow governments to better plan and will increase the likelihood of them reaching a fiscal balance.

3. Futures market back to contango

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- OPEC and oil speculators had a mutually beneficial relationship for the few months following the announcement of the OPEC cuts in late November.
- OPEC's action provided confidence in a much higher level of bullish bets from hedge funds and other money managers, which in turn boosted oil prices by about $10 per barrel - a windfall for OPEC.
- The futures market flipped from contango into backwardation - short-term futures trading at a premium - which induced some stock drawdowns around the world.
- But the contango is back, with June 2017 contracts trading at a $1.50 per barrel discount to December 2017 futures. This reduces the chances of more price gains in the near-term.
- The longer-than-expected time it has taken for meaningful stock drawdowns is putting pressure on OPEC to extend its cuts. That could help bring futures back towards backwardation.

4. Little progress from OPEC deal

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- The OPEC cuts were intended to drain excess levels of crude sitting in storage, a prerequisite for a more "balanced" oil market.
- But when the OPEC deal expires in June, oil inventories in OECD countries will be back where they started at the beginning of the year.
- Part of the reason is the ramp up in OPEC production at the end of last year as members scrambling to take advantage of higher output levels juts before the implementation of the cuts. That higher level of output made its way around the world, filling up U.S. storage tanks in particular.
- At the start of the year, OECD oil inventories stood at 2.98 billion barrels. But in January, when the cuts were put into place, OECD stocks still surged by 70 million barrels. Since then, stocks have started to come down slowly, but it will take until June before that extra 70 million barrels disappears.

5. Russia's economy rebounding as oil prices rise

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- Russia has materially benefitted from participating in the OPEC production cuts, as oil prices have shot up since November.
- Russia's budget revenues are on the rise, with monthly oil revenues back above 500 billion rubles.
- "The agreement on the whole has been working," Ildar Davletshin, an analyst at Renaissance Capital, told Bloomberg. "Russia's reserves are picking up faster, increasing its economic resilience."
- The improved fiscal outlook might convince Russian officials to participate in an extension of the deal.

6. Canadian shale producers see bright future

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- Canada is most known for its vast oil sands reserves, but the liquids rich Montney Shale in Alberta has enormous potential.
- Shale drillers there not only have the ability to sell their product to refiners, as most oil producers do, but they also have the oil sands industry, which needs lighter forms of oil to dilute their viscous bitumen.
- High-cost bitumen is expected to grow 2.2 mb/d to over 2.8 mb/d by 2020, according to Rystad Energy.
- Growth of bitumen production will mean soaring demand for diluent. Shale drillers could struggle to keep up with demand, which will "all but guarantee a premium for condensate in western Canada," Rystad concludes.
- Shale drillers in the liquids-rich Montney Shale have a lucrative future ahead of them.

7. EV sales continue to rise

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- The month of March saw the second-highest monthly sales total ever recorded in the U.S. for electric vehicles. A total of 17,000 EVs were sold for the month.
- That is a 30 percent increase month-on-month, according to SAFE.
- The first quarter of 2017 saw sales jump more than 52 percent from the same quarter a year earlier.
- Tesla (NYSE: TSLA) was responsible for much of the increase. Sales could increase by even more this year when the Model 3 hits the market. More EV models are set to be introduced this year and next, increasing consumer options.

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